Difference Between an Endowment Insurance Plan and Term Insurance Plan

Many times consumers get confused between an endowment/savings plan and a term plan. Let’s understand the difference between an endowment insurance plan and a term insurance plan and the key benefits of opting for a savings plan or a term plan.

Savings and term plans: The Difference between an Endowment Plan and Term Plan

What is the 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 policyholder, his/her nominee will receive the sum assured. Some term insurance plans cover all forms of death, including suicide.
ed to savings and protection.

Why is a term plan purchased?

A sudden demise of an earning member of the family will create not only an emotional impact but also a financial impact on 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 policyholder 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 an Endowment Plan?

A savings plan fulfills your needs related to savings and protection. In case of a term insurance plan, the policyholder only receives a 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 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. This 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.

Now That You Know The Differences Between An Endowment Plan And A Term Insurance Plan…

Why is a Savings plan purchased?

A savings plan or an endowment policy 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, the best endowment policies provide 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.

Premium rates:

When it comes to a term plan, the premium amount is much lesser than that of a savings plan. This is because term insurance policies only cover the risk. A term plan fulfills 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 the 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 benefits along with death benefits. But the sum assured provided as a death benefit by an endowment plan is comparatively less.

Along with the differences between endowment plans and term plans, know why a combination of the two is better for you

A term insurance 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 endowment insurance will not be as high as a term plan. Since the premium rates for a term plan are 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.

 

Aastha Mestry - Portfolio Manager 

An Author and a Full-Time Portfolio Manager, Aastha has 6 years of experience working in the Insurance Industry with businesses globally. With a profound interest in traveling, Aastha also loves to blog in her free time.