What to choose: Term Insurance or Endowment Policy?

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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.

Term insurance

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:

Advantages

Listed here are some of the advantages of a term insurance plan:

• The premium for term life insurance is much lower compared to other types of life insurance policies.
• It is available in flexible terms based on the specific requirements of the policyholder.
• The cost of insurance does not get higher during the policy term as the insured ages. Hence, it is better to sign up for a term cover at a very young age.
• In case of the death of the insured person, the family will get the full sum insured amount.
• Policyholders may also choose various rider covers for children’s education, personal accident benefits, critical illness coverage, etc., along with a term plan to enhance their overall protection.

Limitations

Listed here are some of the limitations of a term insurance plan:

• There is no maturity benefit at the end of the policy term. If the insured outlives the policy term, there will not be any benefit paid to the policyholder.
• The cost of premium is likely to be high depending upon the entry age of the policyholder.
• A term plan does not provide coverage throughout the entire life of a person. The coverage stops at the end of the chosen term.

Endowment policy

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:

Advantages

Some of the advantages of an endowment policy are:

• It pays maturity benefits at the end of the policy term.
• It comes with flexible term options depending upon the requirement of the policyholder.
• If there is financial emergency midway through a policy term, endowment plans allow policyholders to withdraw money up to a certain limit.
• Endowment plans also come with various rider policies like critical illness cover, personal accident cover, education benefit cover, etc. to enhance the level of protection offered.

Limitations

The limitations of an endowment policy are listed as follows:

• Since a portion of the premium is set aside for investment, the cost of an endowment plan is typically much higher than that of a term insurance plan.
• The investment aspect of an endowment plan is subject to market risks. It is likely that the sum assured obtained here may not sustain a family for life.
• If the money is liquidated midway through a policy, the maturity benefit could be much lower.

Highlights of term insurance vs. endowment policy

Here is a quick look of how a term insurance plan compares against an endowment policy:

Conclusion

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.