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Wednesday, March 13, 2013

Term Insurance Vs Whole Life Insurance

Background
When it comes to buying life insurance, neither there is any dearth of plans nor are the insurance companies and their well meaning agents shying of bombarding you up with options. Two of the most fundamental life insurance plans are Term insurance and Whole life insurance. Knowledge about the right insurance plan to buy for yourself can not only save you lot of money but also give you the appropriate risk coverage.

What is Term Life Insurance?

Term life insurance or term assurance is life insurance which provides coverage at a fixed rate of payments for a limited period of time, the relevant "term". After that period expires, coverage at the previous rate of premiums is no longer guaranteed and the client must either forgo coverage or potentially obtain further coverage with different payments or conditions. 
If the insured dies during the term, the death benefit will be paid to the beneficiary. Term insurance is the least expensive way to purchase a substantial death benefit on a coverage amount per premium dollar basis over a specific period of time.
A few other salient features of Term insurance are:

1) Term insurance is usually least expensive
2) The first thing to be decided while buying a term insurance is the sum assured. This is arrived after considering the lifestyle and the current debts of the person taking it up. In the event of the death of the person the sum assured could be used to repay the debt.
3) Term insurance does not give any maturity benefit to the buyer.



What is whole life insurance?
A whole life insurance policy serves as an investment and offers protection for the entire life of a person or up to 100 years whichever comes earlier.

The buyer of this policy pays a premium every year. Out of this a portion will be for protection aspect and the remaining is invested in the company. If a profit is made, the buyer will get a bonus on the invested amount.

Also, the investment grows in value and is returned to the buyer, normally at the value sum assured, if he chooses to withdraw or surrender or lives till the maturity of the policy. In the case of death of the buyer of the policy before the maturity period the nominee would be given the sum assured.

Term versus whole life
Usually, term insurance is a pure risk cover, and allows you to separate your investments from risk coverage. It is the cheapest form of insurance and therefore, if your immediate need is risk mitigation, go for term insurance.

If it is likely that you may need coverage even after 30 years span (ie when your term insurance expires), then go for whole life policy. Whole life insurance plans cover you for your entire life irrespective of the age of your death (or till you attain 100). If you attain 100, you get your sum assured in any case, while there is nothing in return in term insurance.

Conclusion
In nutshell, if you are 30 years today and want to buy one of these policies, and if you have planned your retirement well, and you are quite confident that you are not likely to have financial dependents on you after another 30 years, ie at the age of 60+, then term insurance is the best policy.

If you are unsure about your retirement planning and have fluctuating incomes, it makes more sense to go for whole life insurance.

Cheers

Manoj Arora

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