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Term plan vs endowment insurance plans: Which is more suitable for you and why?

Term insurance is a pure protection life insurance cover that offers financial protection to one's loved ones, against the uncertainties of life. The coverage amount or the sum assured is paid to the nominee in case of death of the insured during the policy tenure.

An endowment plan, on the other hand, is a traditional life insurance cover that offers dual benefits of protection and savings. Though these plans cover the risk of premature death, their main aim is to create a corpus for the policyholder over the plan duration.

Under endowment plans, a benefit is paid either on death or on the maturity of the policy, whichever is earlier.

Usually, there is no maturity benefit under term plans. However, as Dhirendra Mahyavanshi, co-founder, Turtlemint -- an InsurTech company says there is one variant of term plans called Term Plan with Return of Premium Option (TROP) wherein the total premium during the policy tenure is returned to the policyholder on maturity, if the life insured survives for the entire policy tenure.

Though, this is not a general behavior of term insurance.

"In a nutshell, one key differentiator between term and endowment plan is that an endowment policy offers the benefit to save for the future and create wealth. While, a term plan acts as an income replacement option for one’s loved ones, in case something untoward happens to the life insured," explains Anil Kumar Singh, chief actuarial officer, Aditya Birla Sun Life Insurance.

Singh further describes both the plans as non-comparable.

"It is because both of them cater to two distinctive financial needs of an individual," he opines.

Every earning individual with financial responsibilities should opt for both these policies.

Singh advises individuals to purchase a term plan as soon as they start earning, which is at a younger age (to get benefits of lower premiums). While they can invest in an endowment plan to build a disciplined route for savings.

"Endowment plan can come in handy to meet a future financial goal. Besides, it can help in building a corpus for meeting an individual’s long-term financial needs," he suggests.

Karthik Raman, CMO and Head – Products, IDBI Federal Life Insurance seconds Singh's views.

"Objectives such as child’s higher education, securing one’s own future, saving for a goal, building a corpus for retirement can well be served by an endowment plan. There are also various riders that can be added to an endowment plan. If the policyholder survives the term of the plan, then he or she stands to receive the maturity sum assured plus guaranteed additions and bonuses depending on the type of plan," he adds.

One should also note the premium rates of these plans before investing in them.

"Term plans are the cheapest life insurance plans where the premiums are low that allows individuals to afford a high sum assured amount. Endowment Plans, on the other hand, have a higher premium than term plans since they provide an element of savings," Mahyavanshi elaborates.

Talking about other differences, Mahyavanshi says that endowment plans have the option of bonus, guaranteed additions, or loyalty additions to provide a return on the investment. Also, being savings-oriented, endowment plans have a surrender value and a paid-up value and thus offer a policy loan facility as well.

No such benefit is available in term plans since they cover only the risk of premature death.

According to him, a term insurance plan is a must for everyone as it protects the basic income replacement need. It provides financial security to the family even if the breadwinner is not around. Endowment plans, on the other hand, can be chosen by people looking to create a guaranteed corpus through long term investments.

In words of Samit Upadhyay, Chief Financial Officer and Head Product, Tata AIA Life Insurance, "Policyholders must also remember that merely buying term insurance policies is not enough and one needs to buy the amount of sum assured that is adequate to protect the dependents in the absence of a regular income. It is also important that one takes into account liabilities in the present as well as the foreseeable future to arrive at the right amount of cover."

Endowment policies, he adds, offer a smart investment option to the customer with low risk-appetite by planning both their savings outflow and the required regular guaranteed annual income inflows.

Both types of life insurance products also come with tax benefits under Sections 80(C) and 10(10D) of the Income Tax Act, 1961.

Source CNBC TV 18 | 12/10/2020