Understanding The Basics of Term & Health Insurance | Significance and Differences
- What is health insurance, and how does it work?
- What is term insurance, and why is it important?
- Comparing the features of Term Insurance and Health Insurance
Insurance is a legal contract between you and the insurance company, through which you can buy a cover for a certain risk. You pay a premium for a promise that should the risk become a reality - the insurance company will pay you a certain amount of money. Different types of insurance policies help you cover different types of risk. For example - two-wheeler insurance helps you cover the financial impact if your two-wheeler gets into an accident. Home insurance covers the risks that your home (or the things in it) get stolen or destroyed.
Let’s look at a scenario we’re all very familiar with. Say one of your family members - otherwise healthy and fit - contracts an infectious disease. If there’s anything we’ve learned in the last two years with Covid19 - it is that we cannot take our health for granted. Now, this family member will need to be taken to a hospital and treated for a few days at least. And this could cost a lot of money.
Infectious diseases aside, we are constantly at the risk of needing expensive treatments as a result of our sedentary lifestyles and unhealthy habits - and hospitalization costs are soaring by the day. This poses a risk to our financial security - and a good solution to mitigate such a risk is health insurance.
Health insurance is a type of insurance policy that helps you deal with the costs of hospitalization, treatments, and surgery. While it is called ‘health insurance’ or ‘mediclaim’ in India this policy is essentially a comprehensive hospitalization cover - providing a financial cushion for expenses you incur prior to, during, and after a hospitalization.
As long as you pay your premiums regularly, and the policy is active, it will pay for your treatments when they occur, within the terms & conditions. Further, you should know that health insurance is an indemnity cover. Meaning - the payment is made based on the actual expenses incurred - and not the amount available in the coverage amount.
For example, you could have a health insurance cover of INR 5 lakhs/ year. Say you get hospitalized, and the bill amount is INR 2.65 lakhs. The insurance plan will only pay INR 2.65 lakhs (policy terms and conditions will apply), and not the entire 5 lakhs.
In our opinion, unless you’re a billionaire who can afford any amount of money to pay off hospital bills - you must invest in a good health insurance plan for your entire family. In fact, you should pick a large enough Sum Insured that will be enough in the long-term (say 20-25 years later even), and not just enough for today.
Now, let’s take it a step further. Say you’re the only earning member of your family, and your spouse, parents, and children depend on your earnings for their expenses in the short-term as well as in the long term. Say bills, fees, rents, etc. to be paid off today and big-ticket expenses like higher education and weddings to be funded 15-20 years later. What happens to these needs, plans, and dreams if your death were to happen - before you create enough wealth.
In other words, how do you address the financial risk of your death - and protect your family from the burdens that can result? That’s where term insurance saves the day!
Term insurance is a type of life insurance policy that provides your family with a sum of money in case you pass away during the term of your policy. As the cheapest and simplest way to protect the financial future of your family, term insurance is a cost-effective solution to mitigate the financial risk of your death.
It is a pure-risk policy - meaning there is no savings or investment element in it. Simply put - in case your death happens during the policy term, your family is paid a certain amount of money. In case you survive the policy term, the policy simply ends and you don’t get anything back.
We recommend that every earning member of the family, having financial dependents should buy a term insurance plan, to ensure their financial security - in case of their death.
Although term insurance and health insurance are very different types of insurance and mitigate different types of risks - there are many questions on the internet asking which one should people buy, how they compare, and which is better.
Let us present this quick comparison between the two types of insurance plans and their significance in protecting your family’s financial future.
The following table includes the benefits and comparison of Term Insurance Vs. Health Insurance.
|Features||Term Insurance||Health Insurance|
|What does it cover?||A term insurance policy will help provide cover for your family or nominee if you die during the period of the policy duration.||A health insurance policy, helps you to take care of your hospitalization and related bills.|
|What are the benefits you'll be eligible for?||There is no benefit on the maturity of your policy. If you are to outlive your policy duration, then you or your family will not receive any cover amount.||On the other hand, as long as you pay your premiums regularly, the policy helps you in covering for your hospital bills.|
|What tax benefits are available with these plans?|
All term insurance policies are exempted from paying tax as long as you pay your premiums.
The maximum tax exemption limit under Section 80C of the Income-tax Act is 1.5 Lakhs per year.
Here, you have the benefit of claiming a deduction of up to INR 50,000.
The maximum tax exemption limit under Section 80D of the Income-tax Act is 1 Lakh per year (depends on the age of the insured and their parents).
Both these insurance policies play a very crucial role for both you and your family especially today, as we are exposed to various risks and illnesses. On one hand, your health insurance can help you in covering hospital and related medical bills. And on the other hand, if you pass away due to an illness or accident your term policy helps in looking after your nominee or family by providing them with a claim settlement amount.
You can learn more about term insurance - from the very basics to making an informed purchase decision, and ensuring your family gets a smooth claim on our term insurance section.
Similarly, you can check out everything you need to know about health insurance, from our health insurance page.
Looking to buy term or health insurance?
Connect with a Financial Advisor from the Beshak Community Connect Program and get the right handholding for your insurance purchase.
- Insurance is a legal contract between you and the insurance company through which you can protect yourself against a certain risk.
- Health insurance helps you deal with the costs of hospitalization, treatments, and surgery.
- In India, health insurance only provides a financial cushion for expenses you incur prior to, during, and after a hospitalization.
- Health insurance is an indemnity cover - the payment is made based on the actual expenses incurred.
- Term insurance is the cheapest and simplest way to protect the financial future of your family.
- A term insurance plan will provide your family with a sum of money in case you pass away during the policy term. You don’t get anything back if you survive the policy term.
- Both health and term insurance policies play a very crucial role for both you and your family especially today, as we are exposed to various risks and illnesses.
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