Term Plan Or Whole Life Plan - Which One is best ?

There are two basic options available in life insurance – a Term Plan and a Whole life plan. Where term plan offers a cover for a limited period, whole life policies are for a longer duration. Both the options have several features, and are suited differently for individuals. It is thus important to understand both the options fully before making a decision.

What is a Term Plan?
A term plan is the simplest form of insurance. Offering pure protection, it is the cheapest form of insurance available. The plan is for a pre-determined tenure, and does not provide any maturity benefit. The sum assured of the plan would be paid to the nominee only in case of death of the insured during the course of the policy.

Pros:

• Term plans are characterized by low premiums. A true value for money, they offer higher life cover at low costs.
• Term plans are ideal for those with fixed needs such as mortgage, children's education etc that exists only for a specific time. Insurers generally offer term plans for 5, 10, 15, 20 0r 30 years and you have the flexibility to choose a tenure as per your needs.

Cons:

• Term plans do not offer a maturity benefit. It does not offer any cash build up during the course of the policy. Thus if you survive the policy term, you don’t receive anything from the plan.
• Premiums of term plans are definitely lower in younger age. However, in case the policy expires, and you need to renew its term, premiums would be much higher as they increase as you grow older.

What is a Whole Life Plan?
As the very name suggests a whole life plan offers cover for the “whole” or entire lifespan of the policy holder. Though meant for the entire life span, in reality it does not exactly work this way. Insurance companies place a cap on the maturity age of the policyholder at anywhere between 70 to 100 years. After this maturity age, the cover ceases to exist and the policy benefit would be paid out. In comparison to a fixed term plan, whole life plans offer a much longer duration of life cover. They have an attached savings or endowment component to it, making them more expensive.

Pros:

• Whole life policies are for a longer duration and hence accumulate substantial cash value. This is paid out either at the time of death or maturity.
• Whole life plans help to accumulate wealth in the long run. They could either be traditional plans with profit sharing or unit linked plans with market investments.
• As the life cover is available for a longer term, policy holders do not have the hassle of renewing and paying increased premiums. Premiums remain constant through the course of the premium paying term.

Cons:

• The premiums of these plans are more expensive than term covers. As premiums need to be paid for a longer term, paying premiums post retirement may seem to be a burden for many.
• Returns from investments may not be guaranteed especially in unit linked plans. Investors may thus have to settle with lower returns on maturity.

The Decision- Which one is best?The choice between whole life and a term plan primarily depends on your age and stage of life you are in. Term plans may suit you fine if your primary aim is to get a life cover for a limited period cover of say around 20 years, during which time you are sure your goals would be fulfilled.  If you are young and single, opting for a longer period Term Plan, it would work out as a cost effective option.

On the other hand, Whole Life Plans let you accumulate wealth. If you are in mid career, with growing children, a Whole Life Policy would help you accumulate for not only their future but also for your retirement, considering the current scenario of longer working years and increased life expectancy.

To sum up, a Term Plan is ideal for youngsters at the initial stage of their careers who have limited financial resources that is required to start a Whole Life Plan. For those is the later years, a Whole Life Plan makes more sense as it helps build a retirement corpus, or towards estate planning for children.