14 JUN 2016
Difference Between A Term Plan And An Endowment Insurance Plan
Many times consumers get confused between an endowment/savings plan and a term plan. Let’s understand that how a savings plan is different from a term plan, the key benefits of opting for a savings plan or a term plan.
What is a term plan?
A term insurance policy is a pure protection plan. It provides you with a life – cover which means if an unfortunate event of death occurs to the policy holder his/her nominee will receive the sum assured. Some term plans cover all forms of death including suicide.
Why is a term plan purchased?
A sudden demise of an earning member of the family will not only create an emotional impact but also a financial impact to the family members. If that earning member is the sole breadwinner of the family then the situation would be even worse because his/her spouse will have to face the financial burden of repayment of loans, credit card EMIs, utility bills, household expenses, kid’s education fees all alone.
In such a scenario, if the breadwinner had purchased a term plan, the insurance company would provide the nominee with the sum assured which will provide monetary support to the family members. A term plan will provide protection only till the policy term, if the policy term expires and the policy holder is still alive then no benefit will be provided. Hence, it is recommended that you opt for a longer life cover up to the age of 80 so that you can live stress - free
What is a savings plan?
A savings plan fulfils your needs related to savings and protection. In case, of a term insurance plan, the policyholder only receives death benefit i.e. in the event the person survives the policy term, the person will not receive the sum assured on completion of the policy term. If the there’s an unfortunate demise of the policyholder during the policy tenure, his nominee receives the entire sum assured.
In a savings plan, the policyholder receives both maturity and death benefit. Which means the person gets a sum assured on maturity and also in the event of the person’s unfortunate demise, the nominee will receive a death benefit. However, the life –cover i.e. the death benefit provided in a savings plan is way lesser than that which is provided by a term plan.
Why is a Savings plan purchased?
Savings plan or an endowment plan is ideal for long-term goals like buying a car, down payment for a house, international trips, child’s education, child’s marriage, etc.
A savings plan inculcates a regular saving habit. Unlike, other investment options that are linked to the market, a savings plan provides guaranteed returns with a bonus. However, the bonus amount accumulates and is provided at the end of the policy term. This investment option is ideal for those who don’t wish to take any risk and wish to save for their future goals.
When it comes to a term plan, the premium amount is much lesser than that of a savings plan. This is because term plans only cover risk. A term plan fulfils the need for protection and hence the premium rates are low and the sum assured which is provided to the nominee is high. For example, ‘A’ is a 25-year-old guy who pays a premium of Rs 5000 pa for a policy term of 55 years for a sum assured of Rs 1 crore. But if you calculate the total premium amount paid by ‘A’ is only Rs 2,75,000.
When it comes to endowment/savings plan, the premium amount will be higher. This is because an endowment plan mainly caters to the need of savings for a particular goal. Endowment plans do provide guaranteed maturity benefit along with death benefit. But the sum assured provided as a death benefit by an endowment plan is comparatively less.
Why a combination of both is better?
A term plan is a must especially if you are the sole earning member of your family. While a term plan assures protection for your family members, you can also consider opting for a savings plan because a savings plan will provide you with the funds you will need to meet your financial goals. While you may think of opting for a savings plan since it gives you guaranteed returns and a life –cover but you will have to realize that the life –cover provided by an endowment plan will not be as high as a term plan. Since the premium rates for a term plan is comparatively lower, it is recommended that you bifurcate your investment portfolio in such a manner that your need for protection and savings are both met. So in this way you ensure that your funds are enough to meet your financial goals and also your family’s future is secured.
22 JAN. 2018
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