Term Life Insurance vs. Health Insurance: Which Should Be a Priority in Your Financial Plan?

While it may seem like there are many types of insurance and you might not need them all, some basic forms of insurance are crucial for building a well-rounded financial portfolio. Term life insurance and health insurance are two essential components of a secure financial plan, but deciding how to choose between the two, can be confusing. Term life and health insurance both hold importance and should ideally be part of your plan.

If you are unsure about their value, wondering which one is better, or looking to save money by choosing just one, here are some things you need to know about each and how they differ to make a well-informed choice.

How does term and health insurance differ?

Term and health insurance plans differ in many aspects. Term insurance is a life insurance tool that provides financial security for the policyholder’s loved ones in case of an unfortunate event. If the policyholder passes away during the policy term, the nominee receives a lump-sum death benefit.

Health insurance, on the other hand, offers financial protection against healthcare expenses. It provides financial support for hospitalisations, medical treatments, preventative health check-ups, medicines and other healthcare-related costs. The payout from health insurance helps the policyholder manage their medical bills without putting a strain on their savings.

There are several other differences between term and health insurance, as highlighted below:

1.    Benefits

A.    Term insurance offers a death benefit in the unfortunate event of the policyholder’s passing during the policy term. There are no maturity benefits. The only exception to this is the return of the premium term plan that refunds all premiums at the end of the policy term if the policyholder survives the policy term.
B.    Health insurance does not offer any death/maturity benefits. However, it provides insurance payouts if the policyholder makes a claim to cover their healthcare expenses. These claims can be made multiple times during the policy term, up to the coverage limit provided by the plan.

2.    Additional riders

A.    Term insurance offers optional riders such as critical illness, terminal illness, accidental death and permanent disability benefits. These can be added at an extra premium on top of the original plan coverage. 
B.    Health insurance also offers riders such as personal accident coverage, maternity benefits, newborn cover and room rent waivers. These, too, can be added at an extra premium to extend the plan’s coverage.

3.    Tax benefits

A.    The premium paid up to ₹ 1.5 lakh per annum for term life insurance can be claimed for tax deduction under Section 80C of The Income Tax Act, 1961. Additionally, the proceeds received are also exempt under Section 10(10D) of the Income Tax Act, 1961. Furthermore, if the policyholder opts for a critical illness rider, the premium paid towards it qualifies for tax benefits under Section 80D.
B.    The premiums paid for health insurance are eligible for a tax deduction under Section 80D of The Income Tax Act, 1961. Policyholders can claim deductions up to ₹ 25,000 annually, while senior citizens can claim up to ₹ 50,000 per annum. These deductions can cover premiums paid for self, spouse, children and parents, with a total maximum limit of ₹ 1,00,000 per annum. 

4.    Policy tenure

A.    Term life insurance offers long-term coverage that can extend up to 50 years or even until the policyholder reaches 99 years of age. 
B.    Health insurance plans typically have shorter tenures of one or two years but can be renewed periodically for continued coverage.

Do you need two individual term and health insurance plans, or should you prioritise one?

Deciding whether to have both individual term and health insurance plans or to prioritise one depends on what you are looking for.

A term life cover ensures that your loved ones are financially secure in your absence. Term insurance, in particular, provides them with the support to continue their lives without making financial sacrifices. This is why term insurance is an essential piece of a financial plan.

Health insurance is equally critical as it helps cover healthcare expenses. With medical inflation making it harder and harder to cover basic healthcare expenses, covering costs out of pocket can become burdensome for most people. Moreover, some issues like lifestyle ailments and critical illnesses often require prolonged treatments, which can be challenging to manage through your savings alone. Health insurance ensures you have the necessary means to handle such expenses.

If you must choose just one type of insurance, you may benefit more if you opt for term insurance. However, it is advisable that you also select a term insurance plan that also offers health-related benefits. Many term insurance plans include coverage for critical and terminal illnesses, which can help you cover healthcare costs while keeping your coverage under a single plan.

That said, term insurance healthcare riders do not provide coverage for all types of medical expenses. For instance, these plans may not include maternity expenses or newborn care. If you require these, you will need to purchase a separate health insurance policy. But if these are not priorities for you, you can stick with a comprehensive term insurance plan with a healthcare rider to meet your needs.

To sum it up

According to most financial experts, buying both term and health insurance would be best as they serve different needs. However, if you must prioritise one, you can consider opting for term insurance with a critical illness rider, provided its coverage is sufficient for your needs. If the coverage is inadequate, investing in two separate plans is wiser. While saving money now might seem appealing, inadequate insurance coverage could lead to higher expenses in the future. So, make thoughtful and informed decisions to secure both your family’s financial future and your own healthcare needs.