Difference between a Term Insurance and Whole Life Plan
Term insurance and whole life plans are two different types of life insurance plans. While term life plans are the simplest form of life insurance cover available, whole life plans offer some features beyond a term life cover.
See examples below to understand the difference in the workings of both types of plans:
|Term Life Insurance||Whole Life Insurance|
|Ahmad bought a term plan with a sum assured of Rs. 1 crore at the age of 30.|
The plan will cover him for the risk to life for next 30 years until he’s 60.
Ahmad meets a fatal accident at the age of 50,
His family receives Rs. 1 crore as compensation from the insurer.
|Ahmad bought a whole life plan with a sum assured of Rs. 1 crore at the age of 30.|
The plan will cover him until the age of 100; i.e. for next 70 years.
Ahmad dies a natural death at the age of 85.
His legal heirs receive Rs. 1 crore as his legacy
Types of Whole Life Insurance
Whole life insurance is not just a term insurance cover which covers the insured until the age of 100. Whole life plans come in multiple flavours and features:
- Traditional Whole Life Insurance Plans
Traditional whole life plans used an investment component to meet the certain (almost) pay-out need. Since the payout need is certain (average life expectancy being about 60 years), these plans usually worked as endowment plans.
These plans are of three types:
- Participating Whole Life Plans
- Non-Participating Whole Life Plans
- ULIP Whole Life Plans
Participating whole life plans have a higher premium cost as a component of the premium goes towards investment. Though, these plans can pay bonus either at the end of the policy tenure (or at the time of claim payment) or by reducing the premium amount.
Non-participating whole life plans will only pay the sum assured as the claim if insured dies within the policy tenure.
ULIP whole life plans carry the highest premium cost since there is a clear investment component. The plan gathers a maturity value as it continues in an investment fund, similar to the ULIPs.
All of these plans will also pay a maturity value in case the policyholder survives the policy tenure.
- 99 Years Term Plans
99 Years term plans are pure term plans, except the maximum age of coverage is 99 years. For example, a person buying this term plan at the age of 30 can stay covered under this plan for next 69 years, until the insured reaches the age of 99 years.
How is 99 Years Term Plan a Whole Life Plan?
The maximum age of coverage under a traditional whole life plan has been 100 years, while 99 years term plan covers the insured for about the same age.
The 99-year term life insurance also helps the policyholder leave a legacy for the next generation, same as the traditional whole life plan.
How’s 99 Year Term Plan Different?
The primary benefit under the whole life plans is same as a traditional whole life plan. The only difference is that the 99-year term plan does not offer a maturity value if the policyholder survives.
Since there is no maturity value, there is no investment component in the premiums. Thus, the premium of a 99 years term life insurance is far lower than the traditional whole life plans.
How Long Will You Pay the Premium?
This could be the most confusing part, so read carefully…
Both the traditional and 99-years term plans need the policy holder to pay premiums for the whole coverage period. However, different insurers may offer different premium payment terms for traditional whole life plans. Thus:
- You need to pay the premium for the entire term of the 99-years term plans
- Premium payment term can be slightly lower than the policy-term in traditional whole life plans
Whole life plans have been a great way to transfer your financial wealth to the next generation without tax incident for them. However, 99-years term plans have the potential to unseat the traditional plans for the legacy investments.