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Endowment Plan vs Term Plan

6 February 2025

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Are you looking to secure your financial future but aren’t able to choose between an endowment plan and a term plan? Let's dive into the world of insurance and understand these two popular options.

What is Term Insurance?

An insurance policy that covers you for a predetermined amount of time, or "term," is known as term insurance. Payment of the death benefit to the nominee proceeds if the policyholder passes away within this time. Term insurance is known for its simplicity and affordability, offering high coverage at lower premiums. However, it doesn’t have a savings component, meaning there is no maturity benefit if the insured survives the policy term.

What is an Endowment Plan?

An endowment plan is a type of life insurance policy that combines insurance coverage with a savings component. It provides a lump-sum amount to the policyholder either on survival to the maturity date or to the beneficiary in case of the policyholder's untimely death. Endowment plans are utilised as investing vehicles that combine life insurance with savings for long-term financial objectives like retirement, education, and marriage.

Difference Between Endowment Plan and Term Insurance

Feature	Endowment Plan	Term Insurance
Coverage	Life cover with a savings component	Pure life cover without a savings component
Maturity Benefit	Provides maturity benefit along with bonuses (if any)	With no maturity benefit, only a death benefit
Premiums	Higher premiums due to the savings component	Lower premiums as it provides only life cover
Policy Term	Usually longer terms (10-30 years or more)	Depending on the plan they can be short or long term
Investment Component	Part of the premium is invested for wealth accumulation	No investment component
Flexibility	Less flexible, as it's a combination of investment and insurance	Highly flexible with various term options
Risk	Lower risk due to guaranteed returns on maturity	No investment risk as there is no maturity benefit
Tax Benefits	Tax benefits on premiums paid and maturity proceeds under Section 80C and 10(10D)	Tax benefits on premiums paid under Section 80C

How to Choose Between Term Insurance & Endowment Plan?

Choosing between term insurance and an endowment plan depends on your financial goals, risk tolerance, and insurance needs. Here are some factors to consider:

Purpose of Insurance
If your primary goal is to provide financial security to your family in case of your untimely death, term insurance may be the better choice. An endowment plan can be more suitable for you if you are looking for a combination of life insurance and savings for future objectives.
Affordability
Term insurance is generally more affordable than endowment plans. Assess your budget and choose a plan that makes you comfortable paying premiums over the policy term.
Investment Goals
To achieve your goals of providing life insurance and a disciplined approach an endowment plan can help you save and earn profits. Nevertheless, a term plan is more affordable if your only concern is life insurance coverage.
Risk Appetite
Endowment plans are considered low-risk investments compared to other market-linked options. If you're risk-averse and looking for guaranteed^# returns, endowment plans may appeal to you.
Policy Term and Flexibility
Consider the policy term and the flexibility offered by the plan. Term plans are straightforward with flexible term options, while endowment plans usually have longer terms and less flexibility due to the savings component.
Tax Benefits
Both term insurance and endowment plans offer tax benefits* under Section 80C and 10(10D)1 of the Income Tax Act. However, the maturity benefit of an endowment plan is also tax-free, which can be an added advantage.

Conclusion

Both term insurance and endowment plans have unique advantages and serve different financial needs. Term insurance is ideal for those seeking pure life cover at an affordable cost, while endowment plans are suitable for individuals looking for a combination of life cover and savings. Evaluate your financial objectives, budget, and risk tolerance to make an informed decision. Remember, the right choice will depend on your financial situation and long-term goals.

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FAQ for Term Insurance & Endowment Plan

Do I get maturity as well as death benefits with an endowment plan?

Yes, an endowment plan provides both maturity and death benefits. If the policyholder survives the policy term, they receive a lump-sum maturity benefit, often along with bonuses. In case of the policyholder's untimely death during the policy term, the nominee will receive the death benefit, ensuring financial security for the beneficiaries.

How much life cover should I choose with term insurance?

The amount of life covered with term insurance should ideally be based on your financial obligations, future goals, and the standard of living you wish to provide for your dependents. A common rule of thumb is to have a life cover 10 to 15 times your annual income. However, considering factors like existing liabilities, future expenses (such as children's education), and inflation while deciding the cover amount is crucial.

Can the duration of life cover be changed with term insurance?

The duration of life cover, or the policy term, is generally fixed at the inception of a term insurance policy and cannot be changed mid-term. However, some insurers offer term plans with adjustable policy terms, allowing policyholders to extend or reduce the term based on their changing needs. It's vital to check with the insurance provider for such options before purchasing the policy.

Are there any riders available with an endowment plan?

● Yes, endowment plans often come with various rider options that provide additional benefits and enhanced coverage. Common riders include: ● Accidental Death Benefit Rider: Provides an additional sum assured in case of death due to an accident. ● Critical Illness Rider: Offers a lump-sum benefit if the policyholder is diagnosed with a specified critical illness. ● Disability Rider: Provides financial support in case of permanent or temporary disability due to an accident. ● Waiver of Premium Rider: Reimburses future premiums if the policyholder is critically ill or disabled. ● Riders can be added to the base policy at an extra cost and are subject to the terms and conditions of the insurance provider.

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