Difference Between Term Plan And Endowment Plan

If you’ve made the wise decision to invest in a life insurance plan and safeguarded the future of your family, the next step to focus on is choosing the kind of life insurance you wish to purchase. Should you opt for term insurance? Or is it a better idea to purchase life insurance which also gives a maturity benefit? To resolve the term insurance vs. traditional endowment insurance dilemma, it’s important to first address fundamental questions like "What is term insurance?" and "What is traditional endowment insurance?" Let’s get to the basics of these two types of life covers and understand more about their features and advantages.

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?

Understanding the differences between these two kinds of life covers is another important exercise to get to the bottom of the term insurance vs. traditional endowment insurance dilemma. The basic framework for how these plans work is quite similar. Upon scratching this surface, you can unearth quite a few areas of differences between term insurance and traditional endowment insurance. These points are discussed below.

• 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.

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.