A life insurance policy is absolutely necessary to ensure that your family is financially secure in the event of your untimely death. Insurance companies offer a variety of plans for people to choose from according to their future plans and financial needs. There is an ongoing debate between term insurance and whole life insurance for a long time now. Though both plans have pros and cons, it is essential that you familiarise yourself with both before making a decision.
Term life insurance
Term life insurance, as the name suggests, protects you for a fixed period of time. Premiums are paid on a monthly, quarterly, or annual basis. Term life insurance is often purchased for a period of 10 to 30 years.
For example, if you are in your mid-30s and want to ensure that your children’s education is covered even if you pass away, you can get a policy that lasts until you are 50 or 55 years old.
Once every five years, you may need to renew your coverage. As you get older, your premium amount will increase at the completion of the fifth year. In a nutshell, every time you renew your coverage, your premium amount will increase. The beneficiary has the right to make a claim at any time throughout the policy’s term.
Whole life insurance
Whole life insurance provides financial protection for the policyholder for the rest of his life or until he reaches the age of 100. The premium amount is fixed with this type of plan. Although it is more expensive than term insurance premiums, it does not increase every time you renew your coverage. It also allows you to increase your cash value or build it.
Let’s say, you reach the age of 60 and believe your dependents no longer require protection against your death, you can terminate the plan and get the cash value. Term life insurance does not allow for this. You can use this money towards your retirement and live comfortably.
Which one to choose?
Amit gets Rs. 10 lakhs whole life insurance at the age of 30. He will be paying Rs 1000 every month for his entire life. Amit is now 50 and has paid around 2.5 lakhs in life insurance premium. At the age of 80, he has paid a total of 6 Lakhs and he passed away at 80. Though he has paid a total of 6 lakhs, his beneficiary will receive Rs. 10 lakhs. Even if he had lived for another 10 years and wanted emergency funds, he could have closed his plans and received the money.
Amit gets a term life insurance policy for Rs. 10 Lakhs at the age of 30 for a period of 20 years. He needs to pay Rs.500 every month. At the end of 20 years, he would have paid Rs 1,20,000. Now that the plan has ended, he applied for a new term insurance policy for another 20 years. Now he has to pay Rs 1000 every month.
Fast forward 20 years, Amit is now 70 years old and has paid a total of Rs 3.6 lakhs. He feels he cannot pay premiums anymore and his dependents do not require financial support. Hence he closes his plan. He does not receive any funds as he is still alive and hence cannot access them. So Amit has lost around 3.6 lakhs.
If Amit had taken a whole life insurance policy, he would have spent 6 lakhs but would have received 10 lakhs. However, in term life insurance, he spent 3.5 lakhs but did not receive any returns. It would have been different if he had died before 70 as his beneficiaries would have received the money.
Though whole-life insurance is expensive, it could be less expensive in the long term.
If you are somebody who has recently joined work and has yet to start a family, a term insurance plan is best suited for you. This is because term insurance provides high life cover at low premiums.
If you are well-settled and leading a comfortable life already, whole life insurance will be handier. It provides you with a guaranteed return whereas in term insurance if something unfortunate does not happen you do not receive any funds back.
One Step Further
While you have invested your time, energy and money to secure your family with the right insurance policy, take the next important step of digitizing them. Imagine if you also lose your insurance policies in the fire accident? This will only stress you out further.
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