Life insurance comes in different forms depending upon the type of benefit a policyholder is willing to receive. Term insurance and endowment plans are two different variants of life insurance policies. Both these variants come with their own set of advantages and limitations. The benefits obtained from these policies vary a lot based on various factors. One thing that is common to both these policy types is that they both pay for the sudden death of the insured within the policy terms. However, in terms of benefits, cost, and return on investment, these two policy types differ a lot from each other.
A term insurance plan is called a pure life insurance cover mainly because it does not come with any savings benefit. If the insured suffers untimely death during the policy term, the chosen sum insured amount will be paid to the nominee or legal heir. On the other hand, if the insured outlives the policy term, there will not be any maturity benefit. The pros and cons of a term insurance plan can be given as follows:
Listed here are some of the advantages of a term insurance plan:
Listed here are some of the limitations of a term insurance plan:
An endowment policy combines the aspects of insurance and investment under a single policy. This policy offers both death benefit as well as maturity benefit to the insured. In case of the death of the insured during the policy term, the death benefit will be paid in full to the nominee or legal heir. If the insured outlives the policy term, the maturity benefit accumulated at the end of the term will be paid to the policyholder. In endowment plans, a portion of the premium amount paid by the policyholder will be invested in the market and the returns will be paid accordingly. The pros and cons of an endowment policy can be given as follows:
Some of the advantages of an endowment policy are:
The limitations of an endowment policy are listed as follows:
Here is a quick look of how a term insurance plan compares against an endowment policy:
|Term plan||Endowment plan|
|Provides only death benefits||Provides both death and maturity benefits|
|Comes with a cheap price tag||Comparatively much costlier than a term plan|
|Fixed sum assured return against the death of the insured person||Returns are influenced by various market risks to some extent|
|Comes with plenty of rider options||Comes with plenty of rider options|
|Does not have a liquidity option in case of a financial emergency||Can be liquidated up to a certain limit during a financial emergency|
Choosing between a term plan and an endowment plan ultimately comes down to one’s personal choice. However, it is worth noting that the return on investment (on death benefit) is much higher for a term insurance plan compared to an endowment plan. If savings is a mandatory requirement, it is often better to invest in a higher return paying savings scheme rather than using an insurance plan for that purpose. If you don’t want the hassle of having a separate plan for insurance and investment, you can opt for an endowment plan. However, if your family is financially dependent on you, a term insurance policy is the best way to go.