There is no doubt about the importance of having insurance coverage to mitigate certain kinds of risks. There are different types of insurance policies that are available and making the right choice depends on several factors.
It is advisable to consider the age, the number of dependents, time horizon, and personal requirements while deciding the appropriate insurance policy. As a part of overall financial planning, insurance plays a crucial role. Conducting research in order to understand the different types of policies is very important.
In simple terms, life insurance means paying a certain premium towards covering mortality with the objective of providing financial security to the beneficiaries in case of an untoward incident. The two most popular plans include term insurance and traditional plans, which are further discussed below.
Traditional plans
These plans are also referred to as whole life, endowment, or money back insurance plans. Traditional plans include some advantages like tax benefits, risk cover, security, and fixed returns. These policies are the oldest type of life insurance plans and beneficial for risk-averse investors. Most of these plans provide fixed sum assured along with guaranteed or vested maturity bonus. Vested bonus primarily depends on the insurance provider’s profits earned during the year.
Term plans
Term plans are pure life policies providing death benefits to the insured for an annual premium during a specific period of time. If the policyholder passes away during the policy term, the benefits are paid to the beneficiaries. However, if the person survives the entire term, no benefits are paid and further coverage must be purchased by paying the annual premium amount.
Differences between the two plans
Before selecting any these plans, it is essential to understand the difference between the two. Some of the differences are discussed below:
- Risk coverage versus savings
A term insurance plan offers only risk coverage for the insured. This plan does not provide any maturity returns or survival benefits while, traditional insurance plan offers life coverage for the insured along with survival benefits. This means the policyholders can not only ensure the financial security of their dear ones in case of any unfortunate circumstance but can also build an investment corpus that is useful for meeting various financial goals. However, traditional plans are significantly more expensive than the term plans. Considering the amount that is available for paying the annual premium before making the choice between the two kinds of insurance plans will be beneficial.
- Death benefits
Traditional insurance plans are more popular among investors who want security as well as returns on their investments. These insurance policies offer sum assured along with vested or guaranteed survival benefits for the insured. In comparison, the term plans pay the benefits only if the policyholder passes away during the duration of the policy. In case, the individual survives this period, the premium has to be foregone and continued coverage must be availed by paying the appropriate premium.
- Surrendering the policies
Traditional policyholders lose a majority of the policy benefits in case they decide to surrender their policy. The costs associated with the surrender are high and most often, they are unable to even recover the total amount they may have paid until the time of surrender. In addition, traditional plans have certain lock-in period, which means the policies cannot be surrendered until the end of this duration. In comparison, an online term plan can be surrendered by simply not paying the renewal annual premium if the insured does not want to continue the coverage.
Making the right choice
The premium on acquiring higher coverage under traditional insurance is high. Therefore, most people are unable to avail sufficient coverage. Also, the returns are not very high (usually between 5% and 7%), which may further reduce due to surrender and other administrative costs. On the other hand, term plans are cheaper and offer coverage for a higher amount at a lower cost. Individuals who do not have a secure and stable source of income to provide financial security to their loved ones in case of their demise are advised to invest in term plans.
