Choosing the right financial plan to secure the family is one of the most important choices you will make in life. Looking after the ones we love is central to our Indian heritage. We are always looking to take care of the family in their times of need, be it for higher education, wedding or the old age. However, when looking to purchase insurance options, the language and choices can get confusing. You will stumble upon a lot of differences between term life insurance and traditional life insurance. While both plans look to provide financial safety, they have entirely different purposes for the Indian household. Let's understand the differences between the two insurance plans in layman's language and find out the best safety cover for your beloved family members.
Understanding the Insurance Policies
Insurance plans are basically a contract between you and the company, where you pay a nominal amount of money on a regular basis, and in turn, the company promises to financially support a family in times of need. Insurance as a product has always been about securing future needs, but traditional policies offered the assurance of money back with profits after a certain period. However, the new-age mindset now segregates insurance into pure protection covers and wealth creation. To better understand the difference between the two, you must learn about the basics of pure protection or term life insurance.
What is Term Life Insurance?
Term life insurance is the purest form of life cover one can purchase. When you decide to take cover under a term plan, you choose a certain number of years for which you want the cover. You are required to make a payment of a certain percentage of money every year or month for the chosen period of the plan.
When the unfortunate incident takes place and the insured person passes away, the family instantly receives a large amount of money (called the sum assured) from the company to help take care of their financial responsibilities. This money can be used to pay off any personal loans, maintain a family for years during the grieving period or take care of the children's educational needs.
However, if the insured person survives the chosen period of the plan, then he or she receives nothing in return. The term insurance plan is a pure risk cover because the company only pays off in case of death. The death benefit provided under the plan is much larger than the one you would get from a traditional plan. A young earning professional can secure a one crore sum assured for an affordable annual payment.
What is Traditional Life Insurance?
Traditional life insurance is a type of cover where a part of the premium is turned into a saving or investment plan. These plans, including endowment and money-back plans, operate on the premise that while the major chunk of the money you pay goes toward giving a sum assured to your family on death, a certain amount of the premium is invested with the company. The money earned from such a plan (in combination with the assured amount) is then given to the beneficiary as payment along with the sum assured.
The assured amount is generally higher than term life insurance, but the cost for such a plan is much steeper than a term plan. It is important to remember that the money paid to the beneficiary is always guaranteed to be there, regardless of the incident. The company will also give the surviving member a maturity benefit upon the completion of the chosen period of the policy.
How are the Two Policies Different?
To better understand how to choose between the two policies, let's look at some of the basic differences that exist between the two and how a typical Indian family should decide which policy to go with.
Payout Structure and Return of Premium
The biggest difference exists in the payout structure and return of the money paid as a premium. A standard term plan generally does not provide a maturity benefit, whereas eligible traditional plans may provide a maturity benefit according to their policy terms. This means that if the insured is alive till the end of the term, the family will receive the maturity benefit. For many Indian families, this feature of traditional plans is more appealing than the assured payout on death because the family can use this money to fund a big event, like a daughter's marriage.
Cost and Affordability
Term plans are pure risk covers, which is why you can purchase a large sum assured at a very cheap annual premium. Traditional plans, on the other hand, are much costlier for a smaller sum assured. An Indian family with big financial needs might find it hard to pay much higher premiums.
Tax Treatment of Life Insurance
Where an eligible life insurance premium is paid, there could be a deduction from the income of such premiums as per Section 123 together with Schedule XV of the Income-tax Act, 2025, subject to the stipulated conditions and the maximum cap of ₹1.5 lakh on the payment of certain expenses. The deduction cannot be claimed from the income tax rates as per Section 202.
Flexibility and Financial Goals
Term plans are designed to provide financial protection for a specified period, which can be selected based on factors such as income, liabilities, dependants and financial goals. Traditional plans, however, are better suited to those who make long-term financial commitments, like paying the mortgage or children's college fees, throughout their lives.
Which Policy is the Best for You?
It is impossible to name one policy that is best for your entire life, since the type of cover you will need will change as you age. Here are some common reasons why people choose either of the two insurance plans based on their current needs.
Reasons to buy Term Life Insurance
- Young Earning Professionals: Buying a term plan in early years can ensure that you will always leave behind a safety net for the family you are yet to create.
- Families with Big Loans: Paying off a personal or home loan on the death of the earner helps the surviving member avoid getting into a financial bind.
- Sole Breadwinners: If the family entirely relies on your monthly salary, the best way to ensure your family's financial safety in life or death is to leave behind a huge sum assured for them.
Reasons to buy Traditional Life Insurance
- Conservative Savers: If you dislike taking up market risks but still want a good return of money in your old age, then this plan has a money-back benefit clause that suits you.
- Long-term Legacy Planners: If leaving behind a substantial amount of money for your children and grandchildren, regardless of the incident, is your goal in life then going for a permanent or whole life policy is best suited for you.
- Disciplined Saver: If you can barely save a fraction of the money you earn every year, then investing in a term plan for 15 years compels you to have a disciplined approach toward your financial future.
Common Indian Strategy of Buying Term and Investing the Rest
A popular financial strategy these days, especially among Indian planners, is to buy an affordable term life insurance plan and invest the rest of the money in high-growth investment options, like mutual funds, PPF, or NPS. In this strategy, you replace a costly traditional plan with a low-cost term plan. You then take the amount you saved from not buying the traditional plan and invest it in a tax-saving option instead. This approach creates a lot of financial security for the family, as it immediately provides an enormous safety net for the family, and the extra money invested grows manifold over time to help you create wealth.
Steps to Immediately Secure Your Family's Future
Securing your family's financial future can be simple: here are three very easy steps that can get you started on your journey toward financial freedom. First, assess your financial liabilities. Calculate the total amount of money that your family owes right now, including the loans and the expenses that the family can bear for the next few years. Then, estimate the amount of money that your family needs to take care of their daily needs for the next few years, like paying off home loans, food expenses, or your children's higher education.
Second, assess your monthly budget. Choose a premium that you will be able to afford every year without putting a strain on your regular expenses or emergency needs.
Finally, do a little research online and compare the top life insurance plans and their claim settlement ratios before purchasing an affordable life cover that will help secure your family's future.