Difference Between Term Plan and Endowment Plan

What is term insurance?

So, if you haven’t chosen between these two types of life covers yet, you’re perhaps wondering: What is term insurance? Simply put, a term plan is a kind of life insurance policy that is valid for a specific term or period. In case the insured person dies during this term, the insurer pays death benefit to the life assured’s beneficiary. Since term insurance benefits generally do not include any maturity pay-outs, insured people do not receive any gains from a term plan upon surviving the policy duration.

Say, for instance, that you purchase a term insurance plan with a policy duration of 20 years. If you die during this 20-year window, your insurer pays out the sum assured under the plan as death benefit to your nominee. On the other hand, if you survive the policy duration of 20 years, you receive no maturity benefits.

 

What is traditional endowment insurance?

Traditional endowment insurance builds up on the concept of term insurance. In essence, a traditional endowment insurance policy provides insured persons with both deaths benefit as well as maturity benefit. Some traditional endowment insurance plans also offer whole life coverage, so the policyholder can remain insured right up to the age of 99. If the insured person dies when the policy is active, the nominee receives death benefit and bonuses, if any, depending on type of plan chosen and the policy terms and conditions. Alternatively, if the insured person outlives the policy duration, maturity benefits are paid out to the insured.

For instance, say you invest in a traditional endowment insurance plan that offers you protection till you reach the age of 65. Now, if you die before the policy expires, say at the age of 62, the insurance company pays out death benefits under the plan to your nominee. Depending up on the plan opted for, your nominee may also receive any bonuses due as per the plan’s terms and conditions. In case you survive past the age of 65, your life cover expires, and the insurance company pays out maturity benefit under the traditional endowment insurance plan.

 

What is the difference between term insurance and traditional endowment insurance?

Choosing between term insurance and an endowment plan depends on your financial goals—whether you want pure protection or a mix of protection and savings. The table below outlines the key differences between these two types of life insurance plans to help you decide which suits your needs better.

 

 

Both plans serve different financial needs. If you want affordable protection, term insurance is ideal. If you prefer saving while being insured, an endowment policy may suit you better. Always compare plans, premiums, and benefits before making a decision.

 

• The premium charged

  In the term insurance vs. traditional insurance difference, term insurance appears to have the upper hand. The premium charged for term insurance policies is typically much lower than the premium underwritten for traditional endowment insurance plans. This is primarily because term insurance benefits offer pure protection, meaning that term plans only offer you a life cover without any maturity benefit.

  As a result, the premium charged for term insurance is lower when compared with the premium for traditional endowment insurance plans. If you opt for an online term plan, your premium rates could be even lower, since there’s no agent/intermediary commission involved.

  
  

• The element of savings

  In this aspect, traditional endowment insurance plans appear to fare better. That’s because traditional endowment insurance plans offer both death benefit as well as maturity benefit. So, if you survive the policy duration, you still receive monetary gains from the plan. The maturity benefit paid out under traditional endowment insurance plans also may include bonuses, if any depending up on the type of plan opted for and the policy terms and conditions.

  Term insurance, on the other hand, does not have any savings component. Since the scope of term insurance benefits only includes death benefit, you receive no pay-out if you outlive your term insurance policy.

 

How to Choose Between Term Insurance and Endowment Plan?

Choosing between a term insurance plan and an endowment policy depends on your financial priorities. While term plans offer pure life cover, endowment plans combine insurance with savings. To make an informed decision, assess key factors such as your financial goals, expense outlook, affordability, and long-term aspirations.

 

1. Financial Objective

   Start by identifying your primary financial purpose. If your main concern is protecting your family's financial future at an affordable cost, a term insurance plan may be ideal. However, if you seek a dual benefit—life cover and disciplined savings for future goals like education or retirement—an endowment plan could work better. Understanding whether you need protection, savings, or both will guide your decision.

   
   

2. Current & Future Expenses

   Your ongoing lifestyle and expected financial responsibilities play a crucial role in choosing between the two. If your monthly expenses leave little room for savings, a low-cost term insurance plan ensures life cover without burdening your budget. On the other hand, if you anticipate significant future expenses—such as a child’s education or home purchase—an endowment plan can help you build a financial cushion over time.

   
   

3. Affordability

   Affordability is key when selecting the right plan. Term insurance plans offer higher coverage at lower premiums, making them suitable for individuals with limited budgets. Endowment plans come with higher premiums due to their savings component. Consider your current income, future financial commitments, and ability to sustain regular premiums before deciding.

   
   

4. Life Goals

   Your life goals—whether short-term or long-term—should influence your insurance choice. For those focused on wealth creation and achieving milestones like retirement planning or buying a home, an endowment plan offers maturity benefits aligned with those goals. If your priority is to ensure financial protection for your family in your absence, a term plan can be a suitable option .

 

Which one should you choose, and why?

Now that the details of term insurance and traditional endowment insurance have been etched out clearly, you’ll find it easier to make an informed choice between these two types of life covers. Essentially, if you prefer a low-premium plan that only offers a life cover, a term insurance plan would be the preferred choice for you. On the other hand, if you’re looking for a plan that provides a life cover and also simultaneously helps you save for your retirement or for your long-term goals, a traditional endowment insurance policy fits the bill better.

The good news is that irrespective of which kind of life cover you choose, the premium you pay annually is eligible to be deducted from your total taxable income, as per section 80C of the Income Tax Act, 1961. The death benefit and maturity benefit received from either kind of plan are also tax-free, according to section 10(10D) of the Income Tax Act, 1961, subject to provisions therein, as amended from time to time So, compare the areas of differences and make a choice that fits perfectly into your financial plan.

 

Conclusion

Choosing between a term insurance plan and an endowment plan is a vital step in securing your financial future. Both plans offer benefits such as—term plans focus on pure protection, while endowment plans combine savings with life cover. The right choice depends on your financial goals, budget, and long-term expectations. Carefully evaluate your priorities, compare plan features, and seek expert advice to make an informed decision that aligns with your family’s needs and future aspirations.

 

FAQs

Which is Better: Term Plan or Endowment Plan?

The choice between a term plan and an endowment plan depends on your financial goals. If you want affordable, high-coverage life protection, a term plan can be suitable . If you want life cover plus disciplined savings for future goals, an endowment plan may suit you better. Evaluate your budget, long-term plans, and risk appetite before choosing. For pure protection, opt for a term plan. For combined insurance and savings, an endowment plan could be more appropriate.

 

Is an Endowment Plan a Good Investment?

An endowment plan can be a good investment if your goal is to build savings systematically while securing life insurance coverage. These plans offer guaranteed* returns on maturity and serve as a low-risk, disciplined way to accumulate wealth over time.

 

Do I Get Maturity as well as Death Benefit with an Endowment Plan?

Yes, endowment plans offer both maturity and death benefits. If the life assured survives the policy term, they receive the maturity benefit—a lump sum payout. In the unfortunate event of the life assured’s death during the term, the nominee receives the death benefit. This dual feature makes endowment plans suitable for those who want both protection and savings, helping meet future financial goals while ensuring security for their loved ones.

 

How Much Life Cover Should I Choose with Term Insurance?

The ideal life cover in a term insurance plan should be 15 to 20 times your annual income. It should also account for current liabilities, future expenses (like education or marriage), and inflation. Your age, lifestyle, number of dependents, and financial responsibilities play a key role in determining the right coverage. A well-chosen sum assured ensures your family maintains their standard of living in your absence without financial stress.

 

Are There Any Riders Available with Endowment Plans?

Yes, endowment plans come with optional riders that enhance the overall coverage. Common riders include accidental death benefit, critical illness cover, waiver of premium. These riders offer extra protection at a nominal additional cost. Adding suitable riders helps ensure financial support during unforeseen life events, making your endowment policy more comprehensive and secure.