Financial planning needs to begin at an early stage in life. It disciplines you into saving and building a secure financial future. However, you need to find the correct balance between insurance and investment when managing your finances.
Securing the future of your loved ones is a top-most priority in financial planning. Hence, it is wise to invest in a life insurance product that helps you achieve this security. Two policies that immediately come to mind when talking about future finances is the term insurance and endowment plans.
In this section, we will be discussing in brief about term plan and endowment plan.
About Term Insurance Plan
A term insurance plan is the most affordable life insurance product available in the market. The policy offers death benefits to the beneficiaries in case of your sudden death during the policy tenure. In fact, term plans allow you to choose a high sum assured at low premiums. Also, you can enhance the coverage of your term insurance with rider benefits. Overall, the plan provides maximum benefits at nominal rates.
About Endowment Plan
An endowment plan is a widely popular life insurance product in India, mainly because of the twin benefits it offers. Much like Unit Linked Insurance Plans (ULIPs), endowment plans also provide the liberty of enjoying the benefits of insurance and investment. But ULIPs and endowment plans are different from each other in several ways.
Difference between Term Insurance Plan and Endowment Plan
The following table will help you gain perspective on both term insurance plan and endowment plan in detail.
Term Insurance Plan
Type of Plan
Term insurance is solely a risk coverage plan that protects the financial future of your loved ones in your absence.
Endowment plans are a mixture of both insurance and investment.
It Is Ideal For?
The policy is ideal for everyone who wants to secure their family financially.
The policy is ideal for people who are looking to build their wealth over time with adequate insurance protection alongside.
Term insurance is the most affordable life insurance product available in the market.
So, you can avail term insurance with a high sum assured at nominal premiums.
Endowments plans tend to have slightly higher premiums compared to term insurance plans in India.
You can select a sum assured amount that is up to 15-20 times your annual income at a nominal price.
The amount can range between INR 10 Lakh and INR 20 crore for term plans
When it comes to endowment plans, choosing a high sum assured means you would have to pay higher premiums.
You can enhance the coverage of your term insurance plan with rider benefits such as critical illness cover, accidental death benefits, the return of premium benefit, etc.
Similar to term insurance plans, even endowment plans have additional covers such as critical illness cover, accidental death benefit cover, waiver of premium cover, etc.
Ideally, a basic term insurance plan does not offer any maturity benefits.
But if you have opted for the return of premium facility, you will receive the premiums paid towards the policy.
With this facility, the insurer is liable to repay the premiums if you outlive the policy tenure.
The amount received acts as a maturity benefit.
A basic endowment plan provides maturity benefits at the end of the policy tenure.
Term insurance provides death benefits to the beneficiaries of the policy in the event of your premature death.
Since the sum assured in term insurance is high, the amount received as the death benefit is said to be more than sufficient to cover the financial needs of your family.
You receive death benefits in endowment plans as well. However, the sum assured may or may not be sufficient to cover the financial needs of your loved ones.
The premiums paid toward term insurance can be claimed for tax deductions under Section 80C of the old Income Tax regime.
Also, the maturity or death benefits received are tax-free under Section 10(10D) of the Income Tax Act, 1961.
If opted for critical illness benefit, an additional amount can be claimed for deductions under Section 80D.
The premiums paid toward endowment can be claimed for tax deductions under Section 80C of the old Income Tax regime.
The maturity or death benefits received are tax-free under Section 10(10D) of the Income Tax Act, 1961.
Term insurance does not offer any liquidity.
Endowment plans allow partial withdrawal of the sum assured amount in case of financial emergencies.
What to Choose Between Term Insurance Plan and Endowment Plan?
Both these insurance instruments have certain advantages over the other. You need to consider a few things before you decide which policy to purchase and it includes –
Your current financial situation
Your future financial objectives
Once you know what you are aiming towards, it becomes easier to align these objectives with your insurance and investment plans. Besides this, also compare factors such as premiums charged, coverage of the policy, exclusions, claim settlement process, etc. All this will encourage you to choose the right insurance plan to fulfil your needs.
Other types of life insurance plans
1. Unit Linked Insurance Plans
These have three benefits- savings + investment + tax savings. A part of a ULIP is invested in funds as per your risk appetite and another part goes towards insurance.
2. Whole life policy
As the name suggests, this policy lasts for the policy holder’s entire lifetime. Premiums are to be paid continuously for a lifetime and there is a payout only when the policyholder passes away.
3. Money back policy
This is another kind of endowment plan. There are regular part payouts during the policy term. If the policyholder survives for the entire term, they get the balance of the sum assured upon maturity, and the entire sum assured upon death.
Essentially, it all boils down to your family’s financial situation. If you are the sole or major provider for your family, a term insurance plan promises your family a large amount that will sustain them for a long period, and that too without putting a large premium burden upon your salary. But in case there are other earning members in your family and you can afford a higher premium, you may go for an endowment plan that you can afford and that provides you with additional security when you grow older. You can further invest the sum assured as well.