Endowment vs. Term Plans - Learn the Difference

Mumbai, December 16, 2020

Financial planning from an early age inculcates discipline and helps to secure your future. However, it requires smart decisions and risk assessments of various financial instruments to build wealth over the long-term.

One of the most important objectives of financial planning is to secure your family's future. Life insurance is a critical component in your investment portfolio, as it provides monetary security to your family in your sudden absence.

You can choose between different types of life insurance plans, such as money back, endowment, Unit-linked Insurance Plans (ULIPs), and term policies. A common dilemma is choosing between a term plan and an endowment policy.

What is a term plan?

A term insurance policy is a pure life cover and the most affordable way to avail of a high sum assured (SA). Generally, term plans do not provide survival or maturity benefits and pay your nominees the benefits in case of an unforeseen event during the policy’s duration.

What is an endowment policy?

Endowment policies have been popular in India because of their dual benefits. These life insurance plans pay the policy benefits to your nominees in case of an unfortunate incident. Additionally, the policies pay you the survival benefits on maturity.

Having understood endowment policy and term insurance in India, here are some differences between the two:

Term Plans Endowment Policies
Type of cover Pure life cover with no maturity benefits Combine life cover and investment avenue
Sum assured You can select between INR 10 lakh and INR 20 crore based on your income and budget If you opt for a higher SA, the premium will be more expensive
Premium The term insurance premium is the lowest, as the entire amount is used to pay for the life coverage Since a portion of the premium is invested, these policies are costlier than term plans
Policy benefits Most plans pay the benefits to your nominees in your absence during the policy's duration These policies pay the SA to your nominees in case of an untoward event; they also pay the maturity benefits if you outlive the period
Investment goal Ideal when you want to secure the economic well-being of your loved ones in your sudden absence Recommended if you want to combine long-term investment and financial protection for your family
Liquidity These plans do not provide any liquidity Some policies allow you to partially withdraw the SA to meet emergency requirements

The fundamental difference between term plans and endowment policies is insurance and investment. Each of these insurance policies has its pros and cons. So, you must consider your requirements and then make a decision.

If your primary objective is to shield your family with a higher SA at an economical premium, a term plan is a better choice. However, if you are looking to build some wealth over the long-term along with insurance coverage, an endowment policy is more suitable.

Both these insurance plans offer tax benefits under the Income Tax Act, 1961. The term insurance premium and the endowment policy premium are tax-exempt under Section 80C of the Act. Additionally, the policy benefits paid to your nominees in your absence are tax-free under section 10(10D) of the Act. The same section also exempts the maturity benefits received from an endowment policy at the end of its tenure.

The choice between term and endowment policy depends on your family’s monetary needs. If you are the only earning member, you can get a higher SA at a cost-effective premium. You can use an online term plan calculator to determine an adequate SA. Alternatively, if there are other earning members and you can afford a higher premium, you can invest in endowment plans that offer financial stability via the maturity benefits, when you grow older.

(Disclaimer: This is branded content. Readers are advised to exercise due diligence and discretion before entering into any correspondence, investment, purchase, business dealings or any other decision on the basis of this content.)

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