Know all about term insurance vs endowment plans in India!

Term Insurance vs Endowment Plans

Features

Term Insurance Plans

Endowment Plans

Definition 

A vanilla financial tool that extends funds after the death or total and permanent disability of the policyholder. 

A term plan with a savings component extends financial security and helps your finances grow over the years. It also includes a death component.

Flexibility 

❎

✔

Investment Option

❎

✔

Cash Value 

❎

✔

Premiums 

↓ 

Pocket-friendly premiums 

↑

Relatively higher premiums than term insurance plans. 

Pros of Term Insurance Policies

Pros of Endowment Plans

1. Affordable access to a significant sum assured: Since term insurance plans are long-term financial commitments, their premiums are affordable. Moreover, since they act as financial substitutes for an individual in the event of their death, the sum assured is extensive. You only need to calculate the ideal sum assured and the policy tenure. 

1. Life insurance protection 

Endowment policies offer a life insurance protection aspect similar to that of term insurance policies. You choose the coverage amount and the tenure; upon your death during the plan’s tenure, your beneficiaries receive the death benefits (sum assured + rider provisions). 

2. A host of tax benefits: Insurance is a growing industry that is getting larger by the day. In an attempt to boost its penetration, policyholders are extended multiple tax benefits in the form of – 

• Under Section 80C: On the premiums paid towards term insurance policies, you enjoy tax exemptions up to ₹1.5 lakhs. 

• Under Section 10(10D): You get complete tax exemptions on the death benefit received by the beneficiaries and the maturity benefits accepted by policyholders. In this case, there is no upper limit on the tax benefit offered.  

• Under Section 80D: On the critical illness rider’s premium, you can get tax exemptions. This tax benefit is subject to changes based on the policyholder’s age and varies from ₹25k to ₹1 lakh. 

2. Maturity benefits 

Endowment plans offer a savings perk along with life insurance. As per this, you can save considerably over the tenure of your plan. So, you pay a common premium towards the savings and insurance requirements, and if you survive the tenure of the policy, you are offered the saved amount as a maturity benefit. 

3. Multiple premium payment choices: Term insurance plans are not a one-size-fits-all financial tool. Addressing the diverse financial portfolios of its potential policyholders, term insurers offer them a variety of modes for the payment of premiums – 

1. Single payment: This is best suited for policyholders with no financial restraints. He/She can pay up the entire premium in one go, upfront. While this mode of premium payment can earn the policyholder some discount, it also refrains one from tapping into the perks of customising the plan with value-adding riders. 

2. Regular payment: This mode of premium payment is spread thin across the entire tenure of the policy. One can choose monthly/yearly payments, as feasible. 

3. Limited payment: Insurers offer you a set of policy tenure frequencies (5 years, 10 years, 12 years, 15 years, etc.) within which you will be paying off the entire premium. With this mode of payment, while the premium seems relatively higher, the cumulative amount is much more affordable (as compared to regular payments)

3. Guaranteed returns 

In some cases, insurers extend the assurance of a fixed amount to be offered as a maturity benefit in the case you survive the plan. Such guaranteed returns are a mode of financial security for you and your family. 

Whether you survive the tenure of the policy or you don’t, you and your beneficiaries receive a return, either in the form of death benefits or maturity perks. 

4. Customisations obtained over multiple riders: Term insurance plans offer a wide range of riders that help create tailored plans to suit your future financial and medical liabilities. Here is a look at the most common riders – 

1. Critical Illness Rider: Your term insurance policy lists out a few ailments under this rider. If diagnosed with any of these ailments, the provider will offer you a sum assured that is either above the base amount or a part of it. You can use this sum to meet any financial requirements. 

2. Waiver of Premium: In the case, you have been diagnosed with a critical or terminal illness, or have been left permanently and completely incapacitated due to an accident, this rider ensures that you don’t need to pay the premium towards your term plan to keep it active. 

3. Increasing/Decreasing Cover: Say some unprecedented expenses emerge in your life in the form of an unplanned child, or there is a shot at mitigating expenses considering your dependents are becoming financially independent faster than you assumed – so there might be a need to introduce some adjustments to your coverage amount. However, term insurance plans are not usually flexible, and you would need a rider like this to introduce any changes to the cover amount. 

4. Terminal Illness Benefit: If diagnosed with a terminal ailment whose prognosis gives you a couple of months at the most, a terminal illness rider would extend you a unique perk – the insurer will offer you your sum assured, to be used as per your requirement. 

5. Accidental Death Benefit: While vanilla term plans offer your beneficiaries a death benefit that is equal to your sum assured, with this rider, in case the death is caused by an accident, the beneficiaries are offered an additional cover amount. 

6. Lifestage Benefits: In the event of a major life stage development (higher education, marriage, childbirth, etc.), the insurer boosts your cover amount by a pre-decided amount.

4. Returns protected against market volatility 

Unlike certain investment tools that are directly linked to market performances, Endowment policies offer a certain degree of protection against market volatility. Thus, policyholders are less exposed to the day-to-day fluctuations of financial markets.

5. Locked-in premiums: Say you purchase a term plan for ₹1 crore coverage when you are 25 years old. 

And say your older brother also purchases a term plan for ₹1 crore coverage, but he is 35 years old. 

Take a look at how the premiums differ (considering both are non-smokers, salaried and have the coverage till they are 65 years old)

Now, understand this: the premium on your term plan is locked in according to your age at purchase, and you pay the same amount throughout the entire tenure of your policy. So, the earlier you purchase the plan, the less you pay! 

5. Tax benefits 

Under Section 80C of the Income Tax Act, 1961, you can claim deductions up to ₹1.5 lakh for premiums paid towards your Endowment plan.

Under Section 10(10D) of the Income Tax Act, you can claim tax exemption benefits on the death and maturity benefits received from Endowment policies. 

6. Dual death benefit payout options

For the payout modes, term insurers offer you two options – 

Based on your family’s financial requirements, planning, and goals, you can opt for the mode that suits them the best. 

6. Loan provisions 

Some endowment plans offer the option to take a loan against the policy’s cash value. This comes in handy if you need some immediate financial help and don’t need to surrender the plan. 

Cons of Term Insurance Policies

Cons of Endowment Plans

1. Stringent eligibility criteria: Since term insurance plans offer a considerable coverage amount at pocket-friendly premiums, the insurers have kept the eligibility criteria pretty stringent and factor in aspects like your

While some of these help them determine the payout risk, others act as catalysts in calculating the cover amount. 

1. High premiums 

Since endowment policies offer a savings component, the premiums are typically higher than those of term insurance plans. This may not be an ideal financial move since the savings component of Endowment plans is not a value-worthy addition.

2. No flexibility in introducing changes across policies: Once you purchase a term insurance policy, your term insurance provider will not allow you to make any adjustments to your plan unless you have suitable riders added to it. 

So, when purchasing the plan, make sure that you have had professional help in calculating the cover amount (you can opt for a free term insurance cover calculator), choosing the tenure and deciding on riders. 

2. Low returns 

While endowment plans shield policyholders from market-linked investment channels that fetch higher risks due to fluctuations, they also prevent you from getting better returns. The corpus received as maturity benefits is significantly less than what you could have earned with other investment tools. Thus, the spiked premium you pay to cover this perk is not worth it. 

3. Tax Implications on Withdrawals

Usually, both the maturity and death benefits received via Endowment plans are tax-free. However, in case you 

• Withdraw funds from the policy before the tenure ends 

• Avail of loans against the policy

• Surrender the policy before the completion of its tenure

-there will be tax implications in the form of reduced tax benefits or triggered tax deductions.

4. No inflation shield 

The maturity benefits of endowment plans don’t grow at pace with the current inflation rate. Hence, the purchasing power of the maturity benefit may get significantly mitigated over the years, owing to the leaping inflation rates across all industries. 

5. Limited Liquidity

Endowment policies have limited liquidity potential compared to other investment tools and channels. Withdrawal of funds from the plan (before maturity) or surrendering the plan may result in financial implications or mitigated payouts. 

ASPECTS 

Term Insurance

Endowment Plan

DEFINITION/GOAL

A vanilla protection tool that extends financial help in the form of the sum assured and additional amounts (from riders) after the policyholder’s death. 

A protection tool and savings channel combined into one, which offers 

Coverage size

Extensive coverage 

Standard coverage (since a portion of the premium goes into the savings component)

Premium Paid

Affordable 

Spiked (as compared to term plans)

Maturity benefit

None 

Yes

Riders

Yes. The most common ones include – Critical Illness, Accident Death benefit, Terminal Illness, Waiver of premium, Increasing/Decreasing cover, and Life Stage benefits. 

None 

Tax benefits

Yes – Under Section 80C, 80D, 10(10D)

Yes – Under Section 80C and 10(10D)