Major Differences between Term Plan and Endowment Plan
Insurance policies are becoming a necessity nowadays to protect oneself against the uncertainties such as accidents, diseases, illnesses, etc., prevailing in the world. While some prefer to avail a term insurance policy to secure the financial future of their families after their demise, some others opt for money back plans, also called endowment policies, that pay back an amount to the policyholder if he/ she survives the policy term.
Richard, aged 30 years, an IT professional, approached his CA friend to help him choose the right insurance policy. After hearing about the available plans from his friend, Richard decided to go for a term policy but was not happy to hear that he wouldn’t get any returns through the policy. Even though his friend tried to convince him by explaining the benefits of a pure term plan, he wasn’t satisfied. Richard was hopeful of outliving the policy term and felt at least the premium paid should be returned to him at the end of the policy term. So his friend suggested he go for an endowment plan, wherein, in case of Richard’s demise during the policy term, his family will get the death benefit in a lump sum. If he survives the policy tenure, he will receive a lump sum amount. Richard liked the plan very much and chose to buy it, even though the premium was a little higher than the regular term insurance plan.
What is Term Insurance?
Term insurance is the simplest form of life insurance that covers death risk and pays a lump sum death benefit to the beneficiaries of the insured. In case the insured survives the policy period, no benefit is given, other than in the case of return of premium term policy. In a premium return term policy, the policyholder receives an aggregate of all the premiums paid.
Term insurance is purely a financial security tool for the dependents of the policyholder. It is the most useful tool for families having a single earning member.
What is an Endowment Plan?
Though similar to a term plan, an endowment policy provides the dual benefit of paying the death benefit to the nominee if the policyholder encounters death, disability, etc., and also returning the paid premiums and an additional amount to the policyholder on surviving the policy term. These policies are particularly useful for those individuals who wish to receive premiums and an added amount on their survival, which can be re-invested in any other investment plan or can be used as a retirement fund, that can be used for other events of life.
Term Policy vs Endowment Plan
Comparing insurance policies is required before you decide to buy the right policy as it is a one-time decision that will safeguard you for the entire lifetime. However, with a wide variety of plans available in the market, issued by different insurance companies, choosing the best one will often get confusing, which is we felt it necessary to explain the difference between term plan and endowment plan based on the feature set.
4 Major Differences between Term Plan and Endowment Plan
1. Sum Assured
The life coverage or sum assured is the coverage amount that you are insured for. It is also the same amount that will be paid in full in case of the policyholder’s death during the policy term. In terms of endowment plans vs term plans, a higher sum assured is provided by default when you buy term insurance, as there are no survival or maturity benefits. But in an endowment plan, you may be able to secure a cover with a high sum assured as the premiums are usually higher than term plans.
2. Premium Cost
The next significant difference while comparing term insurance vs endowment is the policy premium cost. The premiums of all term plans are the lowest since the death benefit is paid only in the case of the policyholder’s death. But in endowment plans, along with the payment of death benefits, the maturity benefit is payable, pushing up the premium cost.
3. Rider Options
Riders are additional covers that one may attach to their existing policies, to address specific events such as illnesses, accidents, etc. There is no difference in riders when comparing endowment policy vs term policy. Still, the cost increases dramatically with the endowment plan as the normal itself is pretty higher than the pure term plan.
4. Payout Options
The other differentiator in comparing endowment insurance vs term insurance is the multiple benefit payout options provided by the insurer with a term plan in case of any unfortunate event such as the death of the policyholder. One may opt to get paid a lump sum payout, Lump Sum + Regular Monthly Income, Lump Sum + Increasing Monthly Income, etc., depending on the needs of the family members. Still, if the policyholder outlives the policy term, no benefits are paid. On the other hand, an endowment plan pays the maturity benefit plus bonuses, if any, to the policyholder during the policy term.
Endowment Policy vs Term Insurance – Which is better?
As the famous saying “one size does not fit everybody”, buying a life insurance policy is also the same. Even if you are looking for the difference between term insurance and endowment insurance, every person and their family has a unique insurance coverage requirement. While some may choose to go for a pure term plan and are comfortable with the high life coverage offered, some would only want to opt for plans that offer savings and insurance in a single plan, like an endowment plan.
Are you keen to utilize the dual benefit of savings and insurance in a single insurance plan? Are you also hopeful of surviving the policy term? Then an endowment policy is a right fit for you since your premiums shall be returned to you at the time of maturity, which you may use for various purposes. The only point to remember is that you will need to shell out an extra premium for these endowment plans because of the privileges they offer.
A term insurance policy is the best choice for all those who don’t mind paying the premium without any guarantee of returns and are also interested in choosing a higher sum assured that covers all the financial liabilities, debts and still provides a considerable amount of money for the family members to achieve their goals and take care of daily expenses when you are no more in this world.
Hence, before you go deep into knowing the difference between term and endowment policy, think about the purpose of availing of the insurance plan, your family requirements, lifestyle, future goals, risk level, premium payment capacity, etc., and then take the final decision.