Whole Life Insurance vs Term Life All You Need To Know
| Sl No | Table Of Contents |
|---|---|
| 1.1 | Term Life Insurance |
| 1.2 | Whole Life Insurance |
| 1.3 | Table showing differences between whole life and term life insurance |
| 1.4 | Which is better to buy |
| 1.5 | FAQ's on whole and term life insurance |
1.1 Term Life Insurance
Term Life Insurance operates similarly to car insurance: you pay for coverage, but if no accidents occur during the policy term, you don’t receive any benefits. However, if an unfortunate event does happen, such as a car accident, the insurance provides financial support for repairs or other covered expenses.
1.2 Whole Life Insurance
Whole Life Insurance, on the other hand, offers a combination of insurance and investment. Like car insurance, it provides a guaranteed payout in the form of dividends. However, this comprehensive coverage comes at a higher cost compared to term life insurance. While the true expenses of whole life insurance were once unknown, you can now easily calculate its costs using the calculator below.
Whole Life insurance does offer an 80C tax benefit which is higher compared to term life which you have to pay a lower premium for, but it’s important to consider whether this is the most lucrative option for your investments. Alternatives like Public Provident Fund (PPF) or Equity Linked Savings Scheme (ELSS) may offer higher returns. You can explore more about the benefits of investing under section 80C in our article.
1.3 Whole Life Insurance vs Term Life Insurance
| Aspect | Whole Life Insurance | Term Insurance |
|---|---|---|
| Term | Lasts Life Long | Lasts for a speicific period only |
| Cash Value | Has Cash Value | Does Not Have Cash Value |
| Premiums | Very High | Low |
| Premium rise | Same | Will increase as you renew |
1.4 Which is better to buy Term Life or Whole Life?
“Whole Life Insurance vs Term Life Insurance ? When considering purchasing insurance, it’s crucial to assess several factors:
Rate of Return: Evaluate the rate of return offered by whole life insurance compared to other investment options like equity. If whole life insurance offers a superior return, it might be the preferred choice. However, in many cases, equity and other investments yield higher returns, making term life insurance more appealing.
Cost of Coverage: Utilize the provided calculator to determine the cost of coverage per Rs. 1000 and compare it with term insurance. Typically, the cost of term insurance is lower than whole life insurance.
Tax Benefits and Savings: Be mindful of tax implications. Premiums exceeding Rs. 5 lakh per year for whole life insurance may incur taxes on the maturity amount. Term policies generally have lower premiums, minimizing tax concerns. Consult with a Chartered Accountant for detailed insights into tax benefits. Additionally, investing in life insurance qualifies for 80C tax benefits, which can be advantageous.”
1.5 FAQ's on Term Life and Whole Life
1. What is Whole Life Insurance?
- Whole life insurance provides coverage for the entire lifetime of the insured, as long as premiums are paid. It combines insurance protection with an investment component, offering a cash value accumulation over time.
2. What is Term Life Insurance?
- Term life insurance provides coverage for a specific period or “term,” such as 10, 20, or 30 years. It offers pure insurance protection without any cash value component.
3. What is Cash Value?
- Cash value is the savings component of a whole life insurance policy. It represents the amount of money that accumulates over time as premiums are paid. This cash value can be accessed through policy loans or withdrawals.
4. How does Cash Value work in Whole Life Insurance?
- A portion of each premium payment goes towards building cash value within the policy. Over time, this cash value grows tax-deferred and can be utilized by the policyholder for various purposes, such as borrowing against the policy or supplementing retirement income.
5. Can Term Life Insurance accumulate Cash Value?
- No, term life insurance policies do not accumulate cash value. They provide pure death benefit coverage for the specified term, without any investment or savings component.
6. What are Premiums?
- Premiums are the payments made by the policyholder to the insurance company in exchange for coverage. In whole life insurance, premiums are typically higher compared to term life insurance due to the investment component and lifetime coverage.
7. Is Whole Life Insurance more expensive than Term Life Insurance?
- Yes, whole life insurance generally has higher premiums compared to term life insurance. This is because whole life policies offer lifetime coverage and accumulate cash value, whereas term life policies provide coverage for a specific term without any cash value component.
8. Are there Tax Benefits associated with Whole Life Insurance?
- Yes, whole life insurance policies offer tax-deferred growth on the cash value component. Additionally, premiums paid towards whole life insurance may qualify for tax deductions under Section 80C of the Income Tax Act.