"If you buy a term plan, the beneficiaries will receive the guaranteed death benefit only in case of your untimely demise; but in case of an endowment plan, you will receive the entire corpus that you have built over time, once the policy tenure is over"
The first and the major difference that lies between a term plan and an endowment plan is the very nature of the plans. While a term plan is a pure life insurance policy that offers no-frills life cover, an endowment plan, on the other hand, is a combination of investment and insurance. In other words, an endowment plan allows you to save for future. Term plan offers no such long-term saving options. If you buy a term plan, the beneficiaries will receive the guaranteed death benefit only in case of your untimely demise. But in case of an endowment plan, you will receive the entire corpus that you have built over time, once the policy tenure is over.
The Premium
If you are looking for a life insurance plan and hence have talked to a few insurance agents, you may have already seen that the agents are not much inclined to sell a term plan. Why is it so? Is it because endowment plans are better than term plans? Of course not! The sales of endowment plans get them higher profits. A term plan offers comprehensive life coverage at very low premium rates. For the same amount of coverage, an endowment plan will charge higher and if you add riders with your basic plan, the premiums will increase. For instance, for a cover of Rs. 1 crore, a 30 year old non-smoker man needs to pay Rs. 8,500 annually for 30 years under a term plan, but for the same amount of return, he needs to invest around Rs.1 lakh annually for 30 years under an endowment plan. In a nutshell, a term plan is more affordable than an endowment plan.
The Sum Assured
Not only the premium, the sum assured amount also varies depending on the type of plan you choose. Generally, in a term plan, you are allowed to choose the sum assured you require, ranging from Rs 10 lakh to Rs. 20 crore, depending upon your income. As a thumb rule, you are allowed to buy a cover up to 20 times your annual income. However, in an endowment plan, to get a higher sum assured, you would need to put in a big amount of money as annual premium. Just to give you an example, if you pay an annual premium of Rs 20,000 annually under an endowment plan, you can get a sum assured of around Rs.16 lakh for a 30 year period. But if it is a term plan, you can get sum assured of more than Rs 2 crore for same annual premium amount. Moreover, in a term plan, the insurer will pay out the promised amount of money only in case of your death during the policy tenure. In an endowment plan also, the death benefit is payable in case of your unfortunate demise during the policy term. But, if you outlive the entire policy tenure in endowment plan, the insurer will pay out the sum assured as the maturity benefit too.
Additional Features
Both term plans and endowment plans offer a number of rider options. Though you will have to pay extra premiums to buy these riders, the benefits offered by them are undeniable. There are some riders that are available only with term plans, while some are available only with endowment plans. However, some of the riders that both term plans and endowment plans offer include critical illness rider, accidental death benefit rider, hospital cash rider, premium waiver rider and so on. Life insurance plans are good tax-saving instruments. All the premiums you pay under a term plan are exempt from income tax deductions as per section 80C. The sum assured you receive are non-taxable under section 10(10D) of the income tax Act, 1961. Therefore, income tax exemptions are higher in endowment plans as compared to term plans.
What Should Be Your Buy?
If we run a comparative analysis of the two plans, we will find that each plan has certain advantages.
Firstly, the premium rates offered by term plans are much lower compared to the endowment plans. That is to say, the premium amount you pay for Rs. 1 Cr. Cover under a term plan is lower than that you pay under an endowment plan. And, who doesn't want more with a little less?
Secondly, while a term plan offers only the death benefit, an endowment plan offers both the death and the maturity benefits. In other words, both term plans and endowment plans promise to provide the sum assured to your beneficiaries in case of your death during the policy tenure. Endowment plan offers an added advantage as it provides the sum assured as the maturity benefit if the policyholder outlives the policy term. So, an endowment plan is more beneficial if taken mainly for the purpose of saving, but then you can always put money in a higher return paying financial instrument, if the objective is savings. On the other hand, term plans are beneficial for those who want higher coverage at low premium rates, providing financial protection for their family in case they are not around.
Thirdly, liquidity is available under an endowment plan. In other words, if there is an emergency, you are allowed to withdraw money (up to a certain limit) from the corpus of your endowment policy. But, one thing should be kept in mind that, if money is withdrawn, the corpus will reduce resulting in lower returns on maturity. The maturity benefit received under an endowment plan can be used by the policyholder to fulfil different financial needs in his/her life. Hence, child plans and pension plans come under the umbrella of endowment plans. Term insurance plans provide neither liquidity nor the opportunity of such long-term savings for future.
Lastly, the life coverage received under a term plan is quite large in amount as compared to that of an endowment plan. Moreover, the sum assured offered by an endowment plan depends, to some extent, on the performance of the market, especially if it is a participating plan. So, the sum assured offered by a term plan will sustain your family financially, for a long period of time, after your untimely demise. On the other hand, the death benefit received from an endowment plan will help your family overcome the immediate financial hardship brought by your premature death, but it may not be enough to sustain your family for a longer period of time.
The bottomline is that if your family is financially dependent on you, it becomes mandatory for you to have a term insurance plan. But, if the life coverage amount does not matter much to you, and all you want is to save for future, you may opt for an endowment plan, but then keep in mind you have other financial instruments also at disposal in that case.
Source: http://www.businesstoday.in/opinion/columns/money-today/endowment-plans-...