My neighbour asked me last week why insurance is so confusing. She had been looking at policies for three days and still couldn’t figure out what to buy. I get it. The words sound similar but mean different things.
Term Insurance – The Basic Plan
If you are thinking about the difference between term insurance and life insurance, then let’s break down each of these and understand them.
You decide how much your family needs – Rs. 50 lakh or Rs. 1 crore. Pay a small amount monthly for that protection.
If you pass away during the policy years, your family gets the money. That’s it.
Pick your coverage period – 15 years, 25 years, whatever works. Many choose until their kids finish college.
When the policy ends, and you’re alive, nothing comes back. Those payments bought protection. Job done.
My friend compared it to renting. You pay monthly, move out, no refund. Fair enough.
Life Insurance – The Savings Plan
Life insurance means different things to different people. Technically, term insurance is also life insurance. But usually when someone says life insurance, they’re talking about plans that give money back.
These plans split your payment into two buckets. Some money goes toward protecting your life. The rest gets invested in bonds, stocks, and other places.
After 15 or 20 years, you get a lump sum amount. Even if you’re healthy and have never made a claim. The insurance company returns your money plus whatever it earned from investments.
Sounds nice, right? Well, nothing comes free.
What Makes Them Different
I checked quotes last month just out of curiosity. A 35-year-old person can get Rs. 1 crore term cover for around Rs. 900 a month. That’s cheaper than most gym memberships.
The same person wants a traditional life insurance plan with savings? The agent quoted Rs. 7,500 monthly. Big difference.
Why? Because that Rs. 7,500 includes your protection cost plus the money being saved for you.
How Much Protection Do You Get
When insurance is cheap, you can afford more of it. Most financial planners say you need coverage worth at least 10 times your annual income. Term insurance makes that possible without breaking your budget.
My colleague earns Rs. 8 lakh yearly. He needs Rs. 80 lakh to Rs. 1 crore coverage. With term insurance, he pays Rs. 850 monthly and gets Rs. 1 crore cover.
He looked at traditional plans too. For his budget, he could only afford Rs. 15 lakh coverage. That’s not enough for his family’s needs.
What Happens at the End
With term plans, the policy just expires. You paid for protection, you got protection, deal done. Some people don’t like this. They feel like they paid all that money for “nothing.”
But that’s not true. You got peace of mind for 20 years. Your family was protected. That’s worth something.
Traditional policies hand you a cheque at the end. Feels rewarding after paying premiums for so long. People like getting money back.
Why the Difference Between Term Insurance and Life Insurance Matters
If your family depends on your salary, protection should come first. What happens to the home loan if you’re gone? Who pays for your daughter’s engineering college? These are real questions.
Term insurance answers these questions properly. You get massive coverage at a tiny cost.
Traditional insurance tries to do two jobs – protecting and saving. Jack of both trades, master of none. Your protection amount stays low because premiums are high. Your returns might also disappoint compared to mutual funds.
I’m not saying traditional plans are bad. They work for people who can’t save money otherwise. The forced discipline helps. But for pure protection, term insurance beats everything.
The In-Between Option
A term insurance plan with return of premium gives you full coverage like regular term plans. Plus, if you complete the term healthy, you get every rupee back. All premiums paid over 20 or 30 years come back to you.
The regular term plan costs Rs. 1,000 monthly. Return of premium version costs Rs. 2,800 monthly for the same Rs. 1 crore cover. That’s Rs. 1,800 extra every month.
Over 20 years, I’ve been paying Rs. 4.32 lakh extra to get my own money back. If I saved that Rs. 1,800 separately in a simple recurring deposit, I’d probably end up with more money.
What Should You Actually Buy
You have small kids under 10? Parents, depending on your income? Get maximum term insurance coverage. Don’t compromise here.
You earn Rs. 50,000 monthly and can spare Rs. 2,000 for insurance? Buy a Rs. 1 crore term cover instead of a Rs. 20 lakh traditional plan.
You absolutely want money back and don’t mind higher premiums? Return of premium plans make sense. Just don’t reduce your coverage amount to afford them.
Are you disciplined with savings and investments? Stick with cheap term insurance. Invest the saved money in mutual funds yourself. You’ll likely do better.
What I Tell People
Insurance isn’t supposed to be complicated. Companies and agents sometimes make it sound complex.
Basic rule – figure out how much money your family needs. Usually 10 to 15 times your annual income. Then buy that much term coverage.
Don’t worry about getting money back. That’s what investments are for. Keep insurance and investments separate in your head.
A shopkeeper in my area pays Rs. 600 monthly for Rs. 50 lakh coverage. His wife and two kids are protected. Simple plan, does the job.
His friend bought a fancy traditional policy for Rs. 5,000 monthly. Gets only Rs. 10 lakh coverage. Doesn’t make sense to me, but to each their own.
