Understanding the distinctions between term insurance and endowment plans is critical when deciding on the optimal investing strategy. Both of these choices serve various goals and meet a variety of financial demands. In this tutorial, we’ll look at the main features, advantages, and downsides of term and endowment life insurance. This will allow you to make an informed decision about which plan best meets your financial objectives and security needs.
Definition and Purpose
Term insurance is a basic life insurance product that pays a lump-sum benefit to the beneficiaries of the policyholder in the event of the policyholder’s demise during the policy period. It is purely an insurance product and does not provide any return on maturity.
Endowment life insurance combines risk coverage with savings. It pays a single amount of money to the policyholder upon the maturity of the policy or the death of the policyholder whichever comes first. This makes it a dual product that has characteristics of an insurance product as well as an investment product.
Premium costs
The first benefit of term insurance is the fact that it is relatively cheap. The premiums are much lower than those of endowment policies so more people can afford to pay into the policy. The low cost makes it possible for policyholders to go for higher coverage at a small premium.
Endowment policies typically come with higher premiums. This is because they not only offer life cover but also build up a savings component that is paid out at the end of the policy period. This is because the higher premiums reflect the investment aspect of these policies.
Sum assured
Term plans are usually cheaper than the sum assured for a given premium. This is because, if the policyholder dies, the family gets a good amount that can enable them to be financially secure.
Endowment policies also have a death benefit, but the sum assured is typically less than a term insurance for the same premium. This is because a part of the premium is paid towards the savings portion of the policy.
Maturity benefits
There are no maturity benefits in term insurance. If the policyholder survives the policy term, no benefits are payable. The purpose is purely to provide a financial safety net for the policyholder’s dependents.
One of the attractive features of endowment policies is the maturity benefit. If the policyholder survives the term, they receive the sum assured along with any bonuses. This can be a significant financial boost, especially for long-term planning.
Flexibility
Term insurance plans are generally simple and not as elaborate. They are flexible in terms of limits and policy durations but do not include any savings or investment component.
Endowment policies are less flexible than term plans mainly because they are a combination of both. Once the premium amount and policy period are decided, it becomes quite challenging to alter any aspect without compromising the benefits.
Policy tenure
Term insurance plans are available with policy terms ranging from 5 years to 40 years. This flexibility enables policyholders to select a term that corresponds with their fiscal obligations and objectives.
The duration of endowment policies is long, which is between 10 and 30 years. This is so because the policy is designed to accumulate a corpus over time through regular savings.
Riders and add-ons
Term insurance plans often come with optional riders such as critical illness cover, accidental death benefit, and waiver of premium. These riders enhance the coverage and provide additional financial protection.
Endowment policies also offer riders, but the choices may be limited compared to term insurance. Common riders include critical illness and accidental death benefits.
Tax benefits
The premiums paid towards term insurance are allowed as deductions under section 80C of the Income Tax Act. The amount received by the nominees in the form of death benefits is also tax-free under Section 10(10D).
Endowment policies also have similar tax exemptions under Section 80C for the premiums paid. The maturity proceeds and death benefits are tax-free under Section 10(10D), which makes them appealing from a tax perspective.
Loan facility
Term insurance does not have any loan facility because there is no saving or investment aspect in these plans.
The surrender value of endowment policies can be used to secure loans for policyholders. This can be helpful during the time of financial emergencies without having to give up the policy.
Surrender value
Term insurance does not have any loan facility because there is no saving or investment aspect in these plans.
The surrender value of endowment policies can be used to secure loans for policyholders. This can be helpful during the time of financial emergencies without having to give up the policy.
Endowment policies acquire a surrender value after a few years of premium payments. This value can be received if the policyholder decides to discontinue the policy before maturity.
Return on investment (ROI)
In terms of insurance, there is no aspect of investment return as it is purely for risk coverage. The amounts paid as premiums are for compensation.
Endowment policies offer returns through bonuses and guaranteed additions. The ROI though is comparatively lower than other pure investment products mainly because of the insurance factor.
Risk coverage
Term insurance provides extensive risk coverage at an affordable cost. The primary focus is to offer a high sum assured to ensure the policyholder’s family is financially secure.
Endowment policies provide moderate risk coverage due to the dual nature of the plan. The sum assured is typically lower than term insurance for the same premium amount.
Investment aspect
Term insurance offers adequate protection against risk at a low cost. The main concern is to provide a large sum assured so that the policyholder’s family remains financially protected.
Endowment policies offer moderate risk coverage because of the two-in-one plan. The sum assured is generally less than the term insurance for the same premium amount.
Suitability
Term plans are ideal for people who want to have a high-risk cover at an affordable price. They are suitable for those who want to guarantee their family’s financial stability in their absence due to an early death.
Endowment policies are appropriate for those who seek risk cover as well as savings. They are best suited for generating long-term funds and creating a corpus that can be used in future.
Claim settlement
The claim settlement process of term insurance, being a pure risk coverage product, is usually uncomplicated and fast. Insurance companies work hard to make sure that the nominees receive their money on time.
The claim settlement for endowment policies may slightly be longer than for other policies because of the combined nature of the policy. The maturity benefits as well as the death claims must be handled properly.
Ending note
The decision between term insurance and endowment plans is based on your financial goals, risk tolerance, and coverage requirements. Term insurance provides high-risk coverage at a low cost, making it an excellent option for protecting your family’s financial future. Endowment policies, on the other hand, offer both insurance and savings, making them ideal for long-term financial planning. Understanding the features, benefits, and limitations of each can help you make an informed decision and choose the best investment plan in India. Always assess your financial situation and consult with a financial advisor to ensure that the chosen policy aligns with your long-term objectives.
