Life insurance offers a range of products to fulfill every requirement. Whichever plan you choose, it guarantees financial protection for your family, irrespective of whether it is during your lifetime or after.
Endowment insurance and term insurance are two popular plans. While both plans offer life cover, they also serve different requirements. To know the difference between endowment plan vs term plan, it is important to first understand each plan individually.
What Is An Endowment Plan?
An Endowment Plan is a low-risk savings plan that combines investment with insurance in one policy. Endowment Plans can offer Guaranteed (Non-Par), Partly Guaranteed (Par) or Market Linked (ULIP) returns, depending on the policyholder’s requirement. They are ideal for fulfilling long-term goals as they accumulate a large corpus when invested for the long term. This is paid as a lumpsum at policy maturity. This corpus is also useful in case of any unexpected emergency. Should anything unfortunate happen to the policyholder, the amount is paid to the nominee.
What Is A Term Plan?
Term insurance is a pure protection plan. It is the simplest and most affordable type of insurance. You can decide upon the life cover that will provide substantial financial security to your dependents, and pay the premiums towards that. This life cover, which is always higher than the amount paid in premiums, is paid out as a death benefit in the event of the policyholder’s death. Term plan does not offer significant growth or returns on your investment. However, they are best taken when one is younger as the premiums are lower.
Difference Between Endowment Plan and Term Plan
This table will give you the features of both plans at a glance.
| Endowment Plan
| Term Plan
|
|---|
Benefits
| Offers the dual benefit of insurance with life cover plus investment for long term wealth creation
| Offers only life cover
|
Best Suited For
| People who want added financial security from their insurance as well as from their investments
| People who want their dependants to be financially secure, especially in their absence
|
Affordability
| Premiums are higher premiums due to the dual component of insurance and investment
| Premiums are lower as there is only the insurance component
|
Sum Assured
| Sum assured is lower
| Sum assured is higher sum in comparison
|
Savings
| Enables wealth creation by building a corpus for future requirements
| Does not grow wealth and is not a savings plan
|
Maturity Benefit
| Maturity benefit is paid out at the end of the term
| There is no maturity benefit, only a death benefit that is paid in case of the policyholder’s death during the term. If the Return of Premium option is added to the policy, the total premiums paid will be returned at maturity, provided that the policyholder has survived the policy term.
|
Riders
| Additional riders can be purchased for extra financial protection. These include critical illnesses, accidental death, permanent disability
| Additional riders can be purchased for extra financial protection. These include critical illnesses, accidental death, permanent disability
|
Liquidity
| Partial withdrawals are allowed within specified limits for any emergency (only under ULIPs)
| There is no liquidity
|
Tax Benefits
| The maturity benefit and sum assured are exempt under Section 10(10D). The premiums paid are exempt up to
₹ 1.5 lakh in a year under Section 80C
| The premiums paid are exempt up to ₹ 1.5 lakh a year under Section 80C
|
How to Choose Between Endowment Policy Vs Term Policy
Now that you have understood the difference between endowment plan and term plan, you are in a better position to choose the one that best meets your requirements. However, there are certain questions that you must ask yourself before investing in either of the plans:
- What is the purpose of the investment?
Do you want to grow your savings? Are you only looking for financial security for your dependants? Or do you want both investment and insurance? Make your selection depending on the answer.
- How much premium can you afford?
While endowment plans are more attractive due to their wealth creating potential, they also charge a higher premium than term plans. Therefore, it would be advisable to map your current and future financial commitments to be able to afford the premiums in the long run. Similarly, if you want a term plan with a high cover, ensure that you have the means to pay the premiums on time as a missed payment could result in the policy lapsing.
- What are the future ambitions and aspirations you are investing for?
Are you saving for a house? Your children’s higher education or marriage? Retirement? Or do you simply want to ensure a comfortable life for your dependants, should something happen to you? Answering these questions will make it easier for you to choose between term insurance vs endowment.
Both endowment plan and term plan have their benefits but choosing between term insurance vs endowment is subject to your requirements and affordability. Whichever plan you choose, you stand to gain from the financial benefits both plans offer.
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