Term Insurance Plans or Endowment Plans – Which is better?
Times have not been more uncertain than ever before. With the spread of the COVID-19 pandemic, the focus has shifted towards healthy living, and more importantly, the need to have term insurance has grown. The financial commitment offered by a term policy in case of the policyholder’s demise makes it an attractive option compared to other insurance products such as ULIP, a whole life plan, or an endowment policy.
Abhishek Sharma, aged 30 years, is a real estate professional. He had purchased an endowment policy two years back, having a sum assured of Rs. 10 lakhs for a term of 20 years, and is paying a premium of Rs. 51,000 every year. He hopes to outlive the policy term and is hopeful of getting back all the premiums after the policy term, along with guaranteed bonus additions. Ranjan Kumar, his colleague of the same age, had taken a term insurance policy of Rs. 1 crore for a term of 20 years and is paying a premium of Rs. 10,000 per year. Abhishek ridiculed Ranjan for choosing a term plan saying it won’t give him any returns at the time of maturity.
Ranjan had done his research before buying a term plan and was not offended at all. He replied that the total premium towards his term plan would be Rs. 2 lakhs (Rs. 10,000 X 20), whereas Abhishek has to pay 10.2 Lakhs (Rs. 51,000 X 20) as a premium for his endowment policy. Ranjan also plans to deposit Rs. 20,000 every month in mutual funds, with the amount he saves in premium, that will help him generate high returns in the long term. After listening to Ranjan’s investment strategy, Abhishek agreed to take his help in the future over financial decisions.
What is an Endowment Plan?
An Endowment policy is similar to term insurance, where it provides a death benefit to the nominee if the policyholder encounters any unfortunate event such as death, disability, etc. In case the policyholder survives the policy term, then the insurer pays a maturity benefit.
The endowment insurance plans are particularly suitable for those who are willing to get back the premiums on their survival, so they could be reinvested in other financial products or can be used for other life events.
Term Insurance vs. Endowment Plan:
It is natural to compare insurance policies before deciding to buy the right one that best serves your life’s requirements. When there are a wide variety of plans issued by insurance companies, choosing the one from that lot will be confusing. It is why we are listing the difference between the endowment plan and the term plan based on the offerings of these two plans.
Difference between Endowment Plan and Term Plan
- Life Coverage: The coverage or sum assured is the amount that your nominee will receive Incase anything untoward happens to you during the policy term. When you choose to buy term insurance, opting for a higher cover is possible as it does not offer any survival or maturity benefit. But an endowment plan doesn’t offer a higher sum assured, and even if you can secure an increased cover, the premiums for them are pretty high.
- Premium: The premiums of all term insurance plans are the lowest since the death benefit is paid only in case of the policyholder’s death. It is not the case with endowment plans, where in addition to the death benefit, maturity benefit and loyalty addition are payable if the policyholder survives the policy term. Hence, the premium of endowment plans is higher.
- Rider Options: Riders are nothing but add-on covers that one can attach to the existing term plan to make it more comprehensive. Riders are available in a term plan and endowment plan. Still, the significant difference is the additional cost that one has to bear with endowment plans since their premium is already relatively high.
- Payout Options: This is the differentiator in comparing endowment plan vs. term plan because the features between these two differ here only. In case of any unfortunate event, such as the policyholder’s death, the term plan provides death benefits only to the beneficiary. In addition, some term plans offer a choice to choose from different payouts, such as Full lump sum payout, Lump Sum + Regular Monthly Income, Lump Sum + Increasing Monthly Income, etc. Still, in case the policyholder outlives the policy term, there are no benefits paid.
In an endowment plan, the nominee is eligible for death benefit on the demise of the insured. However, if the policyholder survives the policy term, the insurer pays the maturity benefit plus bonuses, if any, along with the total premiums paid during the policy term.
Term Insurance and Endowment plan – Which is better?
There is a popular advantage, “One size doesn’t fit all,” which can be applied in buying life insurance also. Every person has a unique need. While some prefer to opt for a pure term plan and are satisfied with the high coverage offered, some would want to combine savings with insurance and choose an endowment plan.
Suppose if you don’t mind paying the premium and not get them returned, for a policy that covers all your financial liabilities, debts and still provides a considerable amount of money for your family members to achieve their goals and take care of daily expenses when you are no more in this world; in that case, term insurance is the best choice. Moreover, the premium that you pay for the entire term is also affordable.
Are you a person who is looking at getting the dual benefit of savings and insurance over a single plan? If you are also confident of surviving the policy term, buying an endowment policy is the right choice since you will get back the premiums paid and the maturity benefit. But do remember that you need to pay an extra premium for these plans compared to term policies because of the returns they offer.
Therefore, before you make the final call on a term plan or endowment plan, assess your family requirements, lifestyle, future goals, protection amount, premium payment capacity, rate of return, and finally, the purpose of availing of an insurance policy.
