Life Insurance is a contract between an individual and the insurance company, where an insurer guarantees to pay a specified amount (sum assured) either in case of the death of the individual or at the end of the policy term. For such contract, insurance company charges an amount (premium) periodically from the individual who buys an insurance policy. An insurance policy can be broadly divided into two categories: savings plan and term plan. Even though both plans offer insurance, the benefits are vary significantly. So, let’s carefully look at the difference between these plans based on certain factors -
Basic Understanding of Savings and Term insurance plans
In Saving Plans, premium paid for the insurance policy is divided into two components – one is mortality charges i.e., the actual cost of insurance in a policy and the second part is investment part, which is to build a corpus or fund. In such plan, sum assured plus bonus or fund value will be returned to the insured person at the end of the policy term. However, in the case of term insurance plan, the insurance premium is charged only for risk cover. In such insurance policy, the insurance company pays the amount of sum assured to the nominees of the insured person only in case of his/her death. Term policies cover only one component i.e. risk cover. Hence, premium paid for term insurance plans are much lower as compared to saving plans.
Basic Differences Between Term Plan and Saving Plan
1. Premium: In a term life insurance plan, only death risk is covered, thus premium paid for term insurance is much lower as compared to the savings plan. While in the case of saving plans, sum assured along with other benefits are being paid to the insured at the end of the policy term. Therefore, in such case, premium is also charged for the investment part.
2. Term(period) of the Plan: Both insurance plans depend upon age, financial goals of the insured, dependency of the family on the insured person etc. Long duration plans are better if you are young as you will be charged lower premium for the risks covered under the plan. On the other hand, in savings plan, if the insured person dies during the policy term, then the payout of the sum assured along with bonus will be issued to the beneficiary immediately.
3. Maturity/Death Benefits: In both the plans, nominees will get the sum assured if the insured person dies. Although, in case of survival, maturity benefits would be payable under saving plans only.
4. Tax Benefits: Premiums paid under term insurance plan as well as savings plan are eligible to tax deduction under section 80C of the Income Tax Act. In addition to this, sum assured payable to the dependents of the insured in case of his/her death is also exempted.
5. Subcategories of Policies: Under savings plan, there are few subcategories such as endowment plan, whole life policy, unit linked insurance plans, retirement plan, annuity plan, and money back policy. However, under a term plan, no further categories are available.
6. Suitability of the Plan: Generally, advisers say that term insurance plan is the best, but the suitability of the insurance plans depends upon the financial goals of the individual. So, if the purpose of the insurance policy is to cover the death risk then only term plan is better. Although, if you want to cover death risk as well as want to build a corpus for a specific financial goal, then saving plans is better.
So, if you do not own any insurance policy yet, then buy one today. There are several insurance companies that are offering term insurance as well as savings plans at affordable prices.