People who think that there is no difference between life insurance vs. term insurance can make financial decisions with grave consequences. Most of the confusion in life insurance vs. term insurance arises from people freely using the expression life insurance for term insurance policies.
You must know the differences between these two policies to ensure that you or the nominees don’t have any troubles while needing the assistance of the insurance policy. You can avoid the tension if you are also planning to purchase a life insurance or term insurance policy. Here you will know everything that differentiates life insurance and term insurance for better decision making.
Top 4 Differences in Life Insurance Vs. Term Insurance Everyone Must Know
When it comes to differentiating life insurance vs. term insurance, most people will have trouble due to the almost similar meaning of the names. To clear this misunderstanding, one needs to understand the particular features where they both differ. Given below are some points where these two policies are clearly differentiable.
Return Of Premium
Life insurance policies have a return of premium clause in their terms and conditions. It means the nominee will get mortality benefits in case of the sad demise of the policyholder. But the policyholder will also get funds as maturity benefits in case of survival at term end of the life insurance. So, in life insurance, the policyholder receives assured returns with the policy no matter what.
However, term insurance does not have a maturity benefit. So, if anything happens to the policyholder during the term, the nominee will get mortality benefits. But in case, if the policyholder survives at term end, they won’t get any monetary benefits or returns for investing in the policy for all those years. It is a significant factor that shows the difference between life insurance vs. term insurance.
Life insurance policies are also capable of giving extra interest returns for the investment into the plan. This guaranteed interest rate can be as high as 8% or 10%. Thus, it makes life insurance a good substitute for an investment plan.
Term insurance does not have any maturity returns, so there is no question about interest or investment potential.
As life insurance has high life cover amounts and high-interest rates, their premium amount is also similarly high. But considering that these funds have an assured return, there is no worry in investing funds as long as they are affordable.
On the other hand, term insurance doesn’t have a return of premium. So, it can have a very cheap premium amount.
Returns To Investment Ratio
The return to investment ratio of life insurance is decently high. In case of demise or survival, the ratio is equivalent to the interest rates they provide.
But the premium amount is much lower in term insurance. So, in case of demise, the returns to investment ratio of mortality benefits can be much higher. Sometimes even higher than 30% or 40%. However, as there are no maturity benefits, the returns to investment ratio are 0% if the policyholder survives the policy term. So, term insurance is a 50-50 risk.
If you are learning about these differences in life insurance vs. term insurance for the first time, they will amaze you because of the misconception about these policies. Even though both of these plans provide life cover, they serve very different purposes. So, make the right decision on an insurance plan based on your requirements.