What is the difference between ordinary life insurance and term insurance?



I heard about “term insurance” whose meaning is not clear to me. Can anybody please explain what is the difference between ordinary life insurance (like those offered by LIC) and a term insurance? What are the advantages and disadvantages of the two?

What is the difference between ordinary life insurance and term insurance?
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9 Replies to “What is the difference between ordinary life insurance and term insurance?”

  1. Term Life Insurance provides death benefit protection for a specified period of time. Term life insurance is a good choice if you are young, can’t afford the much-higher costs of whole life insurance, and have financial obligations that will disappear in time, such as a car loan or mortgage.

    Whole Life (Ordinary Life) Insurance provides protection for your entire life. The premiums are much higher than for term insurance, and they are stretched out over a period of time. Once your policy is paid up, the insurance company invests excess dollars for you. In addition to providing protection, the policy becomes part of your savings plan.

    An ordinary life insurance policy is a combination of a term insurance policy and a “savings account.” The policy owner pays a level premium, which is usually higher in the early years, and excess amounts are used to fund the savings account (also known as the cash value). Ordinary life insurance allows the policy owner to choose one of the following options, even if the insured doesn’t die.

    receive some of the premium back in the form of a low-cost policy loan
    surrender the policy for cash
    receive a reduced life insurance benefit at death
    continue the current life insurance benefit for a reduced time period


  2. I don’t know what do you mean by “ordinary insurance”.

    Basically term insurance means “pure risk cover”, the way you insure your car. You pay premiums for the term (duration in years) for which you want to be insured. If something happens to you, nominee gets the risk cover amount, if you survive your premiums are exhausted. They are cheap. For a cover of about 20 lacs for 20 years (if your present age is around 30) your premium would come around 8000 per annum. So if you die within 20 years the nominee will get 20 lacs else you will pay 20 premiums of 8000 each.

    Other insurances are investment based in which you get returns on premiums like “cash back” policies or “unit linked insurance policies (ULIP)”. In such policies you get returns on your insted premium in case of survival and risk covered amount in case of death.

    Hope this helps


  3. There are some good answers but one point I want to mention is that Term Insurance is usually renewable every 5 years. At each renewal, the premium goes up. As you get closer to retirement age the premiums go up steeply.- far higher than Ordinary Life insurance.
    So term is a great deal for young people who have children and maybe a mortgage since there will be a lot of expenses to raise and educate children as well as pay off the mortgage if the breadwinner dies young. Once the children are grown the need for a lot of insurance is less. So it would be nice to have a lot of term while there are family responsibilities and some ordinary life to provide some burial insurance/mortgage insurance for your spouse.



  4. Basically there are two types in Life Insurance. Term and Endowment.

    In Term Insurance the sum assured is paid in case of death of life assured.
    In Endowment the sum assured is paid in case of your surviving term of policy.

    LIC offers both the types.


  5. Hi Abhik,

    Here are the details:

    1. term Insurance: Term insurance is pure insurance product. It is the base of any insurance product, be it a endowment insurance or ULIP. In term insurance, if policy holder dies, then only his / her nominee receives the sum assured. But in case policy holder survives the entire term, then he / she doesn’t receive anything.

    However premiums are very low and it should be taken to insure your financial obligations like home loan, personal loans etc. as well as your life.

    2. Ordinary insurance: I believe, by ordinary insurance you mean endowment and ULIP kind of policies. They are the combination of term insurance and investment component. Part of your premium is used to pay for term insurance premium and rest is invested depending your policy i.e. debt products for endowment, child policies, equities for ULIPs and so on. So you receive returns from the investment made out of your premiums. However premiums of investment products are very high compared to term insurance.

    If you need more help, the you can contact me ([email protected]).

    Regards,

    Pranav




  6. Life insurance includes ‘investment-type’ and ‘term’ insurance. Investment-type insurance includes policies that pay out on a certain date or when you die. Term insurance pays a lump sum if you die before a set date term insurance. In its simplest form, it pays out a specified amount if you die within a selected period of years. If you survive, it pays out nothing. It is the cheapest way overall of buying the cover you need. but doesn’t pay out anything if you survive the term. The term could be, for example, the number of years left on your mortgage or the number of years until your children are financially independent. Term insurance is sometimes called ‘protection only’ insurance.





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