Term life or whole life insurance – which should one choose? This question troubles many, as both serve different purposes and the choice depends on an individual’s financial goal. As the name suggests, term insurance is like renting a policy for a specific period. If the policyholder passes away during this term, the insurer pays a death benefit to the nominee. In contrast, a whole life insurance policy provides life-long coverage and includes a savings component.
Let’s explore the key features and differences between both types of insurance plans and understand the specific needs they address.
“Term life insurance is most suited to a person for basic protection of his family’s financial future. It is the tool that makes sure that when you are not around, your loved ones will have a certain sum of money, which will enable them to bear the loss without having to worry about immediate income related problems,” says Pankaj Nawani, CEO of CarePal Secure.
The reason it is called term insurance is that in earlier times this contract was valid for a certain period (6 months, 1 year, 5 years etc) hence the work TERM. “However, today we have term plans which offer long-term coverage of 40-50 years and even up to the age of 100. Since some customers, particularly in India, were not comfortable paying money for such long periods with no returns if they survived, the Indian Insurance industry also introduced Term with return of premium (TROP) products,” Nawani elaborates.
Also read: Health insurance checklist: 6 tips to maximise benefits for first-time buyers
Moving on to whole life insurance, Nawani explains its historical background and utility. “Life Insurance plans have a very interesting history. They originated as a means of mitigating the tax liability that arises in countries of North America and Europe at a time of inheritance. When a person dies, the government taxes the legal heir on their inheritance. However, insurance is tax-free. Hence, an insurance plan was developed wherein people invested with the specific purpose of creating a legacy and passing on the inheritance in a tax-free manner. A person would start paying the premium, and his policy would have both a sum assured, like a term plan, but also cash value would get built up like an endowment or a bank account.
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