Term Insurance Vs Whole Life Insurance: Which is Better?

Aug 20, 2018 | 2 months ago | Read Time: 5 minutes | By iKnowledge Team

Both term and whole life insurance plans have been designed to offer you financial protection in times of crisis. We have listed out their pros and cons for you to weigh.

Life is all about the little moments that we enjoy with our loved ones. But these moments can be interrupted with an unforeseen event, leaving your family high and dry. That’s why, getting a life insurance is the first step towards creating a safe and secure future for your loved ones. By investing in a life insurance plan today, you are securing your family’s tomorrow.

Plus, life insurance plans are affordable, which means you are preparing for life’s contingencies without disturbing your current financial goals.

If you want to secure the future of your children and spouse, life insurance plans such as whole life insurance and term insurance will be an essential element of financial planning. It will also give you and your loved ones’ financial independence during an unforeseen event. In short, life insurance offers risk cover so that your family can continue living a happy and fulfilled life even after you.

Life insurance is divided into two main categories:

 Let us understand the difference between whole life insurance vs term life insurance.

  1. Whole life insurance

Also known as permanent insurance, this is a kind of insurance that gives life-long coverage. The premiums are higher as compared to a term insurance policy. A whole life policy also has something known as a cash value feature that acts as a tool for investment.

Here, after a certain period into your policy, you will be able to withdraw money that has accumulated in the form of premiums. However, this money needs to be deposited back or else the death benefit of your policy reduces drastically. Therefore, in a nutshell, permanent insurance offers you financial backing as well as life protection.

 Whole life insurance – Pros and Cons

Pros

Cons

  • Protects you for life

A whole life insurance lasts for as long as the premiums are paid. This insurance, therefore, may survive for as long as you do. Thus, the death benefit will be much higher, ensuring a good financial backup for your loved ones.

 

  • Expensive

A whole life protection plan is known for its notoriously high initial premiums than a term insurance. This makes it a poor choice for someone who doesn’t have a very high insurance budget. It is advisable for someone as old as 25 years to invest in a term insurance plan that can be later converted to a whole life insurance to save on the initial premium amount.

 

  • Makes savings a habit

Since a whole life protection policy needs you to make regular premium payments, this kind of policy inculcates the healthy habit of saving. 

 

  • More complex

A whole life protection plan offers flexibility and customisation in how it can be designed for each investor. That’s why defining the needs and goals of whole life insurance can be more complex than term insurance.

  • Gives returns on your investments

A whole life protection policy comes with a cash value feature, wherein you may borrow from your policy after a certain period. Also, depending on your insurance plan and the current market scenario, you may stand a chance of earning dividends. Therefore, this policy serves as a great investment tool.

 

  • Low growth on investment

Even though growth is guaranteed for whole life insurance cash value, it may be less. This means your sum assured will fetch you returns but on a low growth rate.

 

  1. Term insurance

A  is an insurance policy that comes with a set time frame. As per the rules of this policy, the beneficiary gets the death benefit should you pass away while the policy is still functional. However, if you live to see the policy mature, then no benefit is received by either the nominee or you as the insured. This is purely a protection plan and doesn’t have an element of investment to it.

Looking at the pros and cons of each would help us decide which of these two insurance plans is better.

Term insurance – Pros and Cons

Pros

Cons

  • Value for money

One of the benefits of term insurance is that its premiums are affordable and therefore it may be purchased in large sums. This ensures that the policy gives you complete value for money.

 

  • You may outlive your policy

Due to its shorter time frame, you may end up outliving the tenure of your policy. Therefore, selecting a policy with a longer tenure will be a wise thing to do.

  • Much needed coverage

A term plan covers you at the time when you most need it. This is one of the important term insurance benefits. For example, if you have education expenses for your children or mortgage to pay off, the lump sum amount received from a term plan will support your loved ones financially in your absence. On the other end, once you no longer have any dependents, you could discontinue your term plan. Thus, a term plan protects your loved ones when they need it the most. Aegon Life’s iTerm Plus Insurance plan offers you coverage up till the age of 80 years, thus making it an ideal term plan to invest in.

 

 

  • Does not build cash value

A term insurance plan is not a wealth creation investment avenue. It is a pure protection plan, and does not help you build your cash value. At the end of the term, a term policy will have no value once you outlive it.

 

How Much Life Insurance Should I Get?

The most important objective of life insurance be it term insurance or whole life insurance is to ensure that your family can live the same lifestyle after you as they do now. That’s why, you should get a cover that’s big enough to pay off outstanding dues, and generate an income for your family when you are not around. 

  • Annual gross earnings: Take Ankush’s annual gross earnings and multiply it by 12, which will be Rs. 15,00,000 x 12 = 18,000,000
  • Liabilities: Add the amounts of outstanding loans, and subtract any savings or liquefiable assets (cash, fixed deposits, gold) that you may have. For Ankush, it will be Rs. 37,00,000
  • Monthly expenses: needs. In Ankush’s case, it will be Rs. 60,000

The total of the above should help you arrive at your adequate insurance amount, which will be Rs. 2 crores for Ankush.

To Sum Up

Assess your needs as well as the pros and cons of a term vs whole life insurance plan. Only this would help you make a better decision on which policy to select.


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