Life insurance is basically a contract you enter into with an insurance firm wherein regular premiums are paid to them in exchange for which a stipulated amount would be given to your family in the unfortunate event of your death.. It is looked on as a way of investment, one of the easiest and the least risky ones. Still, awareness about life insurance is so less in India that the masses are in visible confusion about them. They hesitate to purchase them unless helped by a trustworthy insurance agent. Even then, most of the people can’t look beyond the premiums offered and the sum assured.
Though both, pure term insurance and endowment insurance, are life covers, they differ in almost all major aspects. Right from their natures to their benefits, everything about them is different. Read on to know which one you should opt for.
Insurance or Investment
The very nature of term plans and endowment plans vary. A term plan is considered to be a pure life insurance plan. It guarantees the assured sum only if the insurer dies during the tenure. If he survives it, nothing is returned. On the other hand, in the case of endowment insurance, if the insured survives the policy period, a lump sum amount of money is given to him. His savings are invested during the term and a corpus is built by the returns on them, the entire of which goes to the policyholder. Therefore, whereas term plans are purchased for insurance purposes, endowment plans are mainly for investment purposes. They allow a margin for the holder’s demise and that makes them different from many other investment policies.
The main aim of term plans is to provide for the families belonging to the middle class after their bread-earners’ demise, therefore they have to be more affordable. Also, since the money will go down in drains if the policyholder is fine at the end of the tenure, they can’t make us feel the pinch. At the same time, endowment plans are created to save and invest regularly. They also offer maturity value. If the market is particularly good during the policy period, you can manage to make huge profits. Therefore, endowment plans are costlier than term plans. This is why, you see brokers and agents trying to sell you endowment policies instead of pure term insurance.
For instance, for a cover of INR 1 crore in 30 years, a 30-year-old man, who doesn’t smoke, needs to pay INR 8,500 if he goes for term insurance but with the same premium amount, the life cover is only INR 1 lakh if he goes for an endowment plan.
Term Plan Example:
|Gender||Age||Lifestyle||Policy Term||Sum Assured||Premium|
|Male||30 years||Non-smoker||30 years||1 Crore||INR 8,500*|
Endowment Plan Example:
|Gender||Age||Lifestyle||Policy Term||Sum Assured||Premium|
|Male||30 years||Non-smoker||30 years||1 Lakh||INR 8,500*|
*Note: The premium amount is indicative and will vary from insurer to insurer and with time.
The Sum Assured
A higher sum is assured while getting a term plan than an endowment plan. Again, this is because they cater to the different needs of the people. When the steady flow of family income is ruptured, you need a huge amount to compensate for the loss. However, if the policyholder survives the policy period, nothing is returned. Some term plans do offer a return of premiums but then only the principal amount is compensated for. No addition to that is done.
Endowment plans cultivate the habit of savings and regular investment. Some of these offer a pre-decided maturity value whereas the return in the case of others depends on the market condition at the time. They are purchased to meet future expenditures, fulfill monetary goals, pay off mortgages, etc. Therefore, that large a sum is not required.
Financial Goals and Liabilities
- In the case of term insurance, the main purpose is to provide for your family after your demise. It helps them maintain the same standard of living, not compromise on their dreams, pay off your debts, and live a secured life.
- Endowment insurances are purchased for saving purposes. They cultivate a habit to save and invest those savings. Usually, these policies are brought to pay for children’s education or the insured’s retirement. Also, you get to choose among various types of endowment policies, some of which guarantee assured returns while others are totally subject to market risks. However, all endowment plans can act as security for loans or let us withdraw money from the corpus. So, fundamentally, these policies are investments with an insurance aspect as well.
Return on Investment
Return on Investment or ROI is basically the profitability ratio. It helps the investors to understand the nature of their investments as well as gauge their profitability. Being an easy measure, ROI is widely used by insurers and policyholders.
It is mathematically represented as (Net Returns – Investment Cost)/ Investment Cost.
Suppose Radha invests INR 75 lakh for 2 years and gets a profit of 25 lakh.
ROI for Radha = (1 crore – 75 lakh)/ 75 lakh
= 1/3 = 0.33
Now, term insurance offers no return on investment. As said earlier, their main purpose is to look after your family if something was to happen to you else they are of no use. If a person does not survive the policy period, the amount his family will get is much larger than he invested. However, if he does, nothing is returned. On the other hand, some endowment insurance plans, called full endowment insurance, assures the sum during the time of purchase. ROI can be calculated beforehand by the investor. The maturity value of unit-linked endowment insurance depends on the market conditions at that point in time. The lump-sum the holder gets after the end of the tenure may be less than that he invested, thus giving negative returns. Though, if the market isn’t too bad and the company is trustworthy, no need to worry. At least, your premium investments will be repaid.
- Riders – Riders are benefits added to life insurance policies to enhance their coverage. They are available with both term insurance plans and endowment plans. Some of them are accessible only to term policyholders while some are to endowment policyholders. However, many of them, basically the most sought after ones, are available to both. They include critical illness rider, hospital cash rider, premium waiver rider, accidental death benefit rider, etc.
- Payout Options – The maturity value of term insurance can be paid as a lump sum, as monthly income amounts over a long period or both. You can choose the method which suits you the most. At the same time, the endowment plan offers a huge lump sum value on the death of the insured or the maturity of the term.
Under certain sections of the Income Tax Act, 1961 tax exemptions are granted to the people putting their money in life insurance, be it term policies or endowment ones.
- Section 80C(2) guarantees that no tax shall be levied on the sum paid as premiums to insurance companies provided that the tax amount does not exceed INR 1.5 lakh.
- Under section 10(10D), death benefits are exempted from tax, provided that certain terms are adhered to.
- Section 80D exempts the premium paid towards health-related riders on policies from tax.
TERM INSURANCE PLANS
ENDOWMENT INSURANCE PLANS
|NATURE||These are basically for insurance purposes.||These are for investment purposes.|
|PREMIUM||Lower Premium values are offered.||Much higher premium values are offered.|
|SUM ASSURED||A higher sum is assured upon maturity.||A much lower sum is assured upon maturity of endowment plans. Usually, their returns are subject to market risks.|
|FINANCIAL GOALS||They extend financial support to policyholder’s dependents in case of his untimely demise.||They help achieve the policyholders their financial goals such as buying a house, paying for their child’s education, paying off mortgages, etc.|
|RETURN OF INVESTMENT||No ROI||ROI is assured.|
|TAX BENEFITS||Term plans offer exemptions from taxes under various provisions.||Endowment plans offer exemptions from taxes under the same provisions.|
|COVERAGE||Term insurance offers a higher life coverage of about 65-85 years as maximum maturity age (sometimes, even 100).||Endowment plans are normally undertaken for about 5-30 years.|
|SECURITY FOR LOANS||Term plans cannot be used as security.||Endowment plans can be used as security against which loans are granted.|
|LIQUIDITY||Term plans are not liquid in nature, that is money can’t be withdrawn from them if an emergency arises.||You can always withdraw money from the corpus of your endowment policy. However, it will reduce the returns on the maturity of the plan.|
So, the question is still the same. Which of the two life insurance plans should you opt for?
If you are a middle-class worker with dependents, I will suggest you go for a pure term plan. However, do that only when you have saved enough for unforeseen troubles. Do not forget to invest any extra income you make.
Endowment insurance is good for people who have no one solely dependent on them or those who have already made provisions for their loved ones in case of their demise. If you want to save for your children’s education or to buy that house, get an endowment plan to help you with it. Also, if you are facing troubles cultivating a saving habit, endowment insurance may help you. Just remember to go to a trustworthy company to purchase them. Also, keep the other investment options in mind.