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Term Insurance or Endowment Plan: Which is better?

Should one buy term insurance or an investment plan? That is the question we all should ask ourselves before signing up for either one or both of them. Understanding the purpose of insurance and investment separately is necessary. Insurance, if we go by the real meaning, works to protect us from unforeseen events such as death. It offers the policyholders' family a pre-opted Sum assured in case of their unexpected demise.  

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The Sum assured takes care of all financial needs of the family such as Rent, Loans, EMIs, Child Education, etc. Ideally, Insurance is a good fit for those who have financial dependents and liabilities. So, people having dependents and financial responsibilities must buy insurance for the sole purpose of protection.

Investment or a product that is a mix of both investment and insurance must also be bought but after taking into account its offerings. The product that is a mix of investment and insurance offers you income with some protection in the form of insurance. It makes sense to buy such products for your old age when you are through with all your financial and other liabilities. Meaning to say, insurance and investment have their own significance. It is difficult to manage without either one of them.

Let us understand the functioning of Insurance and Insurance-investment products through their representatives, Term insurance vs Endowment plan.

Term Insurance Meaning

Term insurance, as the name suggests, is for a limited period, and has the least possible premium among all insurance plans. You can choose the length of the term for which you would like coverage, up to 35 years. Payments are fixed and do not rise during your term period. In case of an unexpected death, your dependents will receive the benefit amount as mentioned in the term life insurance agreement. You can customize term life insurance with the addition of riders, such as child, waiver of premium, or accidental death.

An endowment policy is a combination of insurance and investment: The policyholder's life is insured for a certain amount. This life cover is referred to as the sum assured.
Some part of the premium gets allocated towards this sum assured. Another part is allocated towards the administrative expenses of the insurer. The remaining portion of the premium gets invested.
Example
If you purchase an endowment policy and pay a premium of Rs 10,000 annually for 15 years, you are likely to get a cover of perhaps Rs 3 lakhs or so, with the amount returned after 15 years with an accumulated bonus, etc.

In term insurance for the same period and the same amount, you are probably to get a cover of minimum Rs.15-Rs 35 lakhs. this means that in case the policyholder dies during the cover period he/she is likely to get a huge amount as the sum insured as compared to an endowment policy, which would provide very little coverage.

It's beneficial to go in for a term insurance policy for protection purposes since it covers the death risk several times, as compared to an endowment policy. No doubt, the sum assured would be returned back in the case of an endowment policy, but the purpose of insurance is defeated as the risk coverage is too low.

Endowment Plan

The endowment plan is the most common and popular in India, because of the dual benefit it offers. Ideally Endowment plan should be opted for as an addition to a pure term plan as the cover provided in Endowment is a little less. It should be bought as an investment tool with the hope to enjoy the benefits of the plan (the original sum and the accumulated bonus) in your lifetime. Endowment plans prove to be quite beneficial when you retire. By buying an annuity policy with the sum received, it generates a monthly pension for the rest of your life.

Most insurance companies provide both term and endowment plans. The premium for sum assured is different for various insurance companies. Tax benefits under Section 80C of the Income Tax Act are available under both cases.

Term plans cannot be overlooked as they are the purest form of insurance, providing you protection against the biggest threat/reality of life- Death. Opt for endowment plans for the sole purpose of investment and you are going to be financially secured for the whole of your retired life. A choice between Term insurance and Endowment cannot be made as each of them has its own significance. Buy a term plan to prepare yourself for an untimely demise and also endowment for future income generation or pension.

Term Insurance Vs Endowment Policy 

Endowment Plan  Term Insurance Plan 
Type of Plan  A mixture of investment and insurance  It is a risk cover plan that secures the financial future of your family in your absence. 
Eligibility  The plan is suitable for individuals who wish to build their wealth over time along with sufficient insurance protection.  The policy is suitable for everyone who wishes to protect their family financially 
Premiums  Endowment plans have comparatively higher premiums as compared to term plans.  Term insurance is the most pocket-friendly life insurance plan available in the market. So, you can purchase term insurance with a high SA at a minimal premium rate. 
Rider Benefits   Endowment plans have add-on covers such as accidental death benefit cover, critical illness cover, waiver of premium cover.  The coverage can be enhanced with rider benefits like critical illness cover return of premium, accidental death benefits, etc. 
Sum Assured  In this, high sum assured means payment of high premiums  A sum assured amount of up to 15-20 times of your annualized income at a minimal price. 
Maturity Benefits  Maturity benefit is provided at the end of the policy term  Ideally, a pure term plan does not provide any maturity benefits. If in case you have bought a return of premium benefit, you will get the paid premiums towards the plan. 
Death Benefit  The plan offers death benefits. The sum assured may or may not be adequate to cover the financial requirements of your family  It also provides death benefits to the nominee/beneficiaries in case of premature death. 
Tax Benefits  Get tax benefits on premium paid under section 80C and tax deduction on maturity benefits under section 10(10D) of the Income Tax Act, 1961.  Get tax benefits on premium paid under section 80C and tax deduction on maturity benefits under section 10(10D) of the Income Tax Act, 1961. In case of critical illness rider benefit, an extra amount can be claimed for tax deductions u/s 80D

*Tax benefit is subject to changes in tax laws. *Standard T&C Apply

Wrapping It Up!

If you are the sole earner of your family, a term insurance plan provides your family a big amount that will sustain with them for a long time and that too without burdening you with large premiums. In case, there are another earning members in your family and you can easily pay a high amount of premium, you may purchase an endowment plan that will provide you with add-on protection when you grow. 

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