Term Plan Or Endowment Policy: Which One’s Better?
Buying life insurance is a responsible and sensible measure you can take to protect your loved ones from future financial setbacks in your absence. Everything is on track today with your income providing your loved ones with the impetus they need for a successful, comfortable life. But you worry that your family will be left in the lurch the moment you are absent and your income stops — and this worry has now spurred you on to buy a good life insurance product.
Life insurance protects your income by offering a handsome pay-out, such as in ULIP, endowment and money back plans, or safeguards your loved ones’ interests with term policies. Which one should you buy, of all the available options in life insurance? This article discusses two of these products — term and endowment life plans — with their broad features and benefits. The last section offers insights on what to consider when buying either of these plans, to help you make a more informed decision.
A term insurance plan…
A term plan is a life insurance product that insures you for a certain ‘term’ or tenure — hence the name. It has one of the most affordable premiums, while providing a handsome pay-out in case the insured has an untimely demise while the plan is still active. The benefits of the term insurance plan are handed over to the policy nominee. There is no maturity benefit in the term plan, i.e. none of the paid premiums are returned to you in case you outlive the plan term.
There are a number of excellent term plans from leading insurers, such as the Saral Jeevan Bima, a pure term insurance policy. Term plans are best suited for those who do not wish to invest in expensive insurance plans but who want a high coverage amount to protect their loved ones in their absence.
An endowment insurance plan…
Meanwhile, an endowment policy is a life insurance product that offers both a death and maturity benefit. It is unlike the term policy in this regard, where it pays you a maturity bonus along with the agreed upon sum assured as ingrained in the plan. Another point of difference is that, depending on the policy and the insurance provider you take it from, the endowment plan may have slightly higher premiums than the term insurance plan. Additionally, you must undergo a medical test before the policy is deemed purchased, which is not always a compulsory stipulation for term policies.
The benefit of taking the endowment insurance life policy is that you can time its tenure to coincide with future milestones. For example, suppose your child is 8 years old today and you wish to accrue money for their higher education when they turn 18 years old. You could buy an endowment plan with a tenure of 10 years that matures just in time to pay for your child’s higher education.
Which one should you take?
Based on the information stated above, you might be left wondering which policy you should take. Here are a few factors to consider:
ü Term insurance pay-outs are substantial. This is a factor to consider in case you have unpaid debts, a growing family with school- or college-going children, a spouse dependent on your income or who does not earn as much as you do, aged parents with medical needs, and so on. The sum assured can take care of all these needs. An endowment insurance may not provide such a substantial pay-out.
ü On the other hand, the endowment plan helps achieve tangible future goals. You could chart out your future financial roadmap and add an endowment plan to help fructify certain goals. This gives your planning a definite direction.
ü If you are looking for the paid premiums to be returned to you, then you are better off buying an endowment or money-back policy. A term insurance plan such as the Saral Jeevan Bima policy will not return your premiums. However, the best term plans from leading insurers do offer critical illness and accident injury covers in their term plans. Go through the product features in detail before making your decision.
ü You could consider buying a term plan if you want the lowest premiums and a high pay-out.
ü There are tax exemptions on premiums paid for both term and endowment life insurance, under Sec 80C of the Income Tax Act, 1961.
ü You could buy a term insurance policy for now, if you are still young and do not wish to invest in a more comprehensive life insurance product. A few years later, you can invest in a suitable endowment plan to bolster your family’s collective future dreams. The pay-outs from both term and endowment plans can benefit your family in your absence.