Both term plans and investment plans are financial instruments that can benefit an individual. Each has unique features, advantages, and disadvantages. Before comparing them, it is first important to understand what they are.
What is a term plan?
In simple terms, the meaning of term insurance is that it provides life cover to an individual for the period of the policy. It is an easy-to-understand type of life insurance with no complicated factors. In term insurance, your nominee can claim the sum assured in case of your sudden demise within the term period.
What is an investment plan?
Investment plans are a type of life insurance with a portion of the investment in it. In such plans, the premium you pay is partly used for your life insurance and partly invested in different funds. You can choose the investments you want to put your money in.
How is a term plan different from an insurance plan?
Once we understand the meaning of both types of life insurance, it becomes more clear and easier to understand how they differ from each other. Here are some factors where term insurance differs from an investment policy –
Type of insurance plan
There are several life insurance policies out there. A term plan is basic life insurance as all it does is simply provide a life cover. Whereas, an investment policy is a combination of insurance and investment. Most people find it comparatively complicated to understand, as it also has an investment factor attached.
Term insurance premiums are affordable. They have the lowest premiums compared to most types of life insurances in the market. Since an investment policy has two elements linked, there are certain charges that you are required to pay for both elements. Also, the premiums are likely to be more than a term plan.
Coverage of the insurance
Usually, when you use a term insurance calculator, you observe you can get high insurance coverage at low premiums. Also, if anything was to happen to you during the duration of the policy, the nominee will get the sum insured. An investment policy works quietly differently than a term plan for sums covered and returns. The insurance part of the policy ensures that it provides the sum covered in the policy to the nominee in case of your sudden demise. Also, the nominee will be given the returns of your investments. While, when you are alive and your investment policy matures, it entitles you to the returns on your investments.
Tenure of the insurance
A term policy does not have any lock-in period. You simply buy a term plan for a fixed tenure and they cover you for that period. The tenure depends simply upon the policy you buy. Whereas, an investment policy has a lock-in period. Usually, most investment plans have a lock-in period of 5 years. Wait for the lock-in period to end for withdrawing your funds partially.
Life insurances have several tax benefits an individual can enjoy. The term insurance premiums you pay are exempt from taxes according to section 80C of the Income Tax Act of 1961. Also, the sum covered that your nominee receives is also exempt from taxes as per section 10(10D) of the Income Tax Act of 1961. Similarly, the premiums that you pay for your investment policy are exempt from taxes under section 80C of the Income Tax Act as well. Also, apart from the insurance sum, the returns that you get on your investment after the maturity of your policy are also exempt from taxes.
Returns of the policy
A term plan is only life insurance and hence, there are no returns on investments associated with it. Whereas an investment policy is subjected to market volatility. Based on the funds you choose and how they are performing, you get returns on your investments. With a term insurance calculator, you can get an estimate of how different funds perform and the returns they offer.
Which one should you choose?
Term insurance differs from an investment policy. There is no best one. Choose the one that fits your needs. The one that is well-aligned with your financial goals and meets your objectives. Many people also prefer to buy both types of policies as a supplement for each other.