Term life or whole life insurance – which should one choose? This question troubles many, as both serve different purposes and the choice depends on an individual’s financial goal. As the name suggests, term insurance is like renting a policy for a specific period. If the policyholder passes away during this term, the insurer pays a death benefit to the nominee. In contrast, a whole life insurance policy provides life-long coverage and includes a savings component.

Let’s explore the key features and differences between both types of insurance plans and understand the specific needs they address.

“Term life insurance is most suited to a person for basic protection of his family’s financial future. It is the tool that makes sure that when you are not around, your loved ones will have a certain sum of money, which will enable them to bear the loss without having to worry about immediate income related problems,” says Pankaj Nawani, CEO of CarePal Secure.

The reason it is called term insurance is that in earlier times this contract was valid for a certain period (6 months, 1 year, 5 years etc) hence the work TERM. “However, today we have term plans which offer long-term coverage of 40-50 years and even up to the age of 100. Since some customers, particularly in India, were not comfortable paying money for such long periods with no returns if they survived, the Indian Insurance industry also introduced Term with return of premium (TROP) products,” Nawani elaborates.

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Moving on to whole life insurance, Nawani explains its historical background and utility. “Life Insurance plans have a very interesting history. They originated as a means of mitigating the tax liability that arises in countries of North America and Europe at a time of inheritance. When a person dies, the government taxes the legal heir on their inheritance. However, insurance is tax-free. Hence, an insurance plan was developed wherein people invested with the specific purpose of creating a legacy and passing on the inheritance in a tax-free manner. A person would start paying the premium, and his policy would have both a sum assured, like a term plan, but also cash value would get built up like an endowment or a bank account. At the time of the person’s death, whichever of the two, sum assured or the cash value, would be greater would get passed onto the nominee or the legal heir of the customer.”

He adds, “Whole life insurance also served as an emergency source of funds in case of emergency.”

In the Indian context, Nawani points out, “Whole Life insurance has been popular in India with companies like LIC, Max Life, ICICI Prudential, and several others offering the same. Inheritance is largely tax-free in India, so the original purpose of whole life might not fit Indian customers just yet. However, tax laws can change suddenly and therefore that’s a factor to be kept in mind. Even without the aspect of taxation, we recommend whole life insurance plans as a great way to build a savings pool that can be used to save in a long-term tax-advantaged instrument. Whole of Life plans are now offered in both traditional and unit-linked versions.”

Kunal Varma, Co-Founder and CEO of Freo, offers a more concise take on the subject. “Term life insurance offers coverage for a specific period, typically 10, 20, or 30 years. It is generally more affordable, making it an excellent choice for those seeking high coverage at a lower cost. This option is particularly suitable for young families, homeowners with mortgages, or individuals with specific financial obligations that will decrease over time.”

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He contrasts this with whole life insurance. “On the other hand, whole life insurance provides lifelong coverage and includes an investment component, known as cash value. While it comes with higher premiums, it provides the security of guaranteed coverage for life and the potential for cash value growth. This option may be beneficial for those with long-term dependents, estate planning needs, or those seeking a forced savings vehicle.”

Varma concludes with practical advice for choosing between the two. “The decision between term and whole life insurance ultimately depends on your individual circumstances, financial goals, and budget. When it comes to purchasing an insurance policy, always remember that the best one is the one that provides adequate protection for your loved ones and aligns with your financial strategy.”