What's better? Term or whole life insurance?

At 28 years, the only savings that Manish had was his fixed deposit which too would be used up for his marriage that is just three months away.

Like most youngsters, Manish was confused about his post-marriage financial security. His friends and well wishers urged him to first take up an insurance cover for him. But Manish was caught between the choices of a term insurance and a whole life insurance.

So how does Manish choose between the two? What are the pros and cons of each of these products?

What is term insurance?

Term insurance is considered the cheapest plan available in the market. Also called term policy it is a pure protection plan and basically designed to protect you from unexpected circumstances.

It is suitable for those with not so normal health conditions and comes in three types with varied sum assured: level benefit, increasing benefit and decreasing benefit.

How does it work?

The first thing to be decided while buying a term insurance is the sum assured. This is arrived after considering the lifestyle and the current debts of the person taking it up. In the event of the death of the person the sum assured could be used to repay the debt. Term insurance does not give maturity benefit to the buyer.

Nevertheless, one can buy riders to the term policies that could give premium on maturity. If the buyer dies before the maturity, the nominee gets the sum assured.

What is whole life insurance?

A whole life insurance policy serves as an investment and offers protection for the entire life of a person or up to 100 years whichever comes earlier.

How does it work?

The buyer of this policy pays a premium every year. Out of this a portion will be for protection aspect and the remaining is invested in the company. If a profit is made, the buyer will get a bonus on the invested amount.

Also, the investment grows in value and is returned to the buyer, normally at the value sum assured, if he chooses to withdraw or surrender or lives till the maturity of the policy. In the case of death of the buyer of the policy before the maturity period the nominee would be given the sum assured.

Whole life policy comes in different packages like policy with limited pay, limited pay with money backs and regular pay options.

Term versus whole life

Choosing between term and whole life insurance policy really depends on the stage in life the buyer is in. For example, term insurance is best suited for an unmarried individual as he can get a high risk cover at a realistic premium amount say a cover for Rs 10 lakh (Rs 1 million) at approximately Rs 2,500 annual premium.

Whole life insurance policy with a term rider would better suit a married person with two young kids. While a whole life plan would take care of the savings aspect of the married person allowing him to withdraw the amount as and when he requires it, the term rider would bring in the much needed additional protection cover at a reasonably low cost.

A simple whole life policy would suit a married person who is in his early 40s with grown up kids for the simple reason that it would cover him for his entire life at a low cost.

How to decide the best one for you

As said above it all depends on your stage in life. Go for a term insurance if you are an unmarried individual. A simple whole life insurance would best suit a 40-plus married person with two grown up kids while the same with a term rider would be best for a married person less than 40 years with two kids!

Whole life policy can help the buyer to save the future of his dependents but at the same time enough caution should be exercised in selecting the amount deducted towards risk cover. This amount should preferably be on the minimum side.

Check the surrender value of the policy and if it would allow withdrawal of money without any penalty.

Experts advise that riders should be taken irrespective of the insurance policy as this will help retain the insurance benefits according to the age profile of the buyer.

For example a buyer with children can opt for the 'waiver of premium' rider on his life policy which will ensure that the premiums are paid till the maturity period in case the buyer dies before the maturity of the policy.

Some of the other riders available with insurance policies are accidental disability and permanent disability, critical illness. However, exclusive Mediclaim policies come with more add on riders for health insurance purposes.