Term insurance vs endowment plan: Which benefits you more?

Here's why term insurance always scores over endowment plans.

Term insurance, as the name itself explains, is for a specific period of time, and has the lowest possible premium among all the other insurance plans available. You can select the length of the term for which you want the coverage right from one year up to 35 years.

Premiums of this policy are fixed and it does not increase during the term period of your policy. In case of sudden death, your dependents receive the cover amount that is mentioned in the term life insurance agreement signed by you at the time you got yourself insured.

In case the individual assured survives the term of policy, no claim is paid to the assured.

Endowment insurance is another type of life insurance policy.

An endowment policy is a life insurance contract designed to pay a lump sum after a specified term (on its 'maturity') or on death of the insured.

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Endowment plans are useful when you retire. By buying an annuity policy with the sum received, it generates a monthly pension for the rest of a retired individual's life.

Endowment policy can be cashed in early (or surrendered) and the holder then receives the surrender value, which is determined by the insurance company depending on how long the policy has been running and how much has been paid into it.

As per the author people in India have lots of misconception about life insurance. Many people buy life insurance for saving, investment and tax saving purposes. This however is not the right approach.

The primary purpose of an insurance policy is to provide financial protection against uncertainties like loss of life and not to act as a pure investment avenue.

This can be explained further with illustrations that compare term insurance with endowment plan. Click NEXT for illustrations

Scenario 1: You buy LIC Jeevan Mitra Endowment policy with following specifications

• Age of the policyholder: 25 years
• Term of plan: 15 years
• Annual premium: Rs 69,829
• Sum assured: Rs 10,00,000
• Total premium paid over a period of 15 years: Rs 10,47,435
• Amount you will get if you outlive the policy term after 15 years: Rs 16,00,000 (this includes sum assured of 10 lakh and an annual bonus of Rs 40,000 per year for 15 years)

Scenario 2: You buy LIC Anmol Jeevan Term policy with following specifications

• Age of the policyholder: 25 years
• Term of plan: 15 years
• Annual premium: Rs 2,356
• Sum assured: Rs 10,00,000
• Total premium paid over a period of 15 years: Rs 35,340

Now instead of buying endowment policy you can pay a premium of Rs 2,356 per year and buy a term insurance of the same um assured and invest the remaining Rs 67,473 (Rs 69,829 minus Rs 2,356) in secure and guaranteed return product like PPF (Public Provident Fund) every year.

In that scenario if you die before the tenure of the policy, that is, 15 years your nominee will get the sum assured of Rs 10,00,000 from term policy plus the amount you had invested in other investment avenues like PPF.

If you remain alive after 15 years, in that case you get nothing from your term insurance policy but the amount you will get from the safe PPF after 15 years will be over Rs 20,00,000 which is more than 16,00,000 in case of endowment policy.

Note: Figures mentioned above are based on certain assumptions. Actual figures may change.

What it tells you is that mixing insurance and investment is not a wise thing to do.

You can do much better by separating the two as shown in the example above. Of course no insurance agent will advise you to do this since it's a question of their livelihoods. You have to ask hard questions and do your own analysis.