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Term vs. Permanent Life Insurance

Planning your finances and managing your investments can be an arduous, multidimensional task. Investing based on your current income can also be a very narrow minded view. As such, you have to weave multiple perspectives into your financial planning besides current income, like your age, expected income or changes in the same, number of dependents, your medical status, your risk appetite etc.

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Insurance forms an integral, core part of any financial planning strategy, as it is a much-needed protective shield when the weather in life turns rough and turbulent. Life Insurance is predominantly available in two forms – Term Life Insurance Plans and Endowment Life Insurance Plans.

Term life policies are simpler to understand and execute. They cover the risk on the life of the assured in return for a premium, which is comparatively lower. In case of death of assured during the term of the policy, which may range from 10 to 30 years, the insurer is bound to pay the death benefit i.e. the sum assured to the beneficiary. If the assured doesn’t die within the policy term, the policy comes to an end at the predetermined term and the risk cover expires.

Endowment policies or Whole life policies, on the other hand, provide risk cover on the life of the assured as well as a retirement benefit of maturity proceeds at the end of the policy. The premiums in these policies are a bit higher. A part of the premium covers risk and the other part yields a conservative rate of return so as to accumulate the sum assured under the policy. Endowment policies are available under numerous terms and various combinations of benefits.

The single most eminent difference between term insurance and whole life insurance is that the former purely serves the insurance needs of the investor wherein the latter is both a savings and investment option combined with insurance. Term plans, hence, are cheaper and provide the much needed safety net for the dependents, at substantially lower costs. If chosen, they free up the remaining portion of the investible surplus to be allocated to other investment avenues generating higher returns while keeping the safety cover over the family members intact.

Whole life insurance is an insurance-cum-wealth creation option. It charges premium at higher rates to cover risks on the life of the assured, as well as builds up a savings corpus, which the insured will get on the maturity of the policy. These maturity proceeds assure a decent rate of return over a term of policy, but they are definitely less than the return offered on market linked instruments.

The other favourable features of Term Insurance include their convertibility into whole life policy at any time during its tenure at slightly higher rates of premium, the deductions under Sec 80(C) of Income Tax Act and an exemption under the same as per the provisions of Sec 10(10D). This means that the maturity proceeds received by the beneficiary in case of demise of the assured will be tax-free.



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