Comparison of Term Plan Insurance With Endowment Insurance Plan
Insurance seekers are on the rise, and why
not? They are a great way of securing our future amidst these vulnerable times.
But seeking insurance and finding the right one aren't similar tasks. The
latter is quite complicated. Firstly, because most people are unaware of what
most of these insurances can provide for them. Secondly, they fail to properly
scout their way and learn about them in spite of having all these virtual resources
to look at. All these online sources of information have actually confused us
and put us in a dilemma. This dilemma prevents them from acquiring detailed
knowledge about the different insurance plans available to them.
For instance, the two most accepted and
traditional life insurance plans are term plan and endowment. Both have their
own share of pros and cons and provide varying aspects of life coverage and tax
savings. But they differ significantly in many aspects as well. These
differences have to be duly noted and analyzed with respect to one’s insurance
requirements and hence acted upon.
The basic differences
between Term plan and endowment insurance plans
Explained below are the basic differences
between the two most sought after insurance plans.
1.
Nature – investment
and insurance
The very nature of the plans varies
significantly. While the endowment plan is a combination of insurance and
investment, the term plan simply covers for your life. Through an endowment
policy, we can opt for future savings while the term plan offers no such
options. The beneficiaries will receive only the death benefit in case of the
policy holder’s demise. In the case of an endowment plan, the entire corpus is
paid out to the beneficiaries once the policy expires.
2.
Premium and sum
assured
Term plans are known to provide life coverage
in exchange for lower premium amounts. The same coverage will be available
against a higher premium when it comes to endowment plans. This is granted
considering that endowment plans also provide a return of corpus once the
policy tenure is over. The same can be applied when it comes to the sum
assured. For the same amount of premium, you will get a lower coverage for term
plans when compared to endowment plans. The reason is the same nature of the
plans.
3.
Additional
characteristics
Both insurance plans come with a number of
additional benefits or, as they call it, riders. Each of these riders requires
you to pay additional premiums in exchange for them. Some riders come with
specific riders, while others are associated with different ones. However,
there are a few riders common to both plans, such as the critical illness,
premium waiver, and accidental death benefit rider.
Pros and cons of each
plan
Let us analyze both plans on the basis of their
advantages and disadvantages.
Term plan insurance
Pros
· Lower rates of premium as compared to endowment plans – Term plan insurance
comes with the benefit of having lower rates of premium as compared to
endowment plans. For instance, for coverage of INR 1 Crore, the premium for the
term plan would be significantly lower than the respective endowment plan.
· Large amount of life coverage provided by term plan insurance – Term plan insurance
provides a larger sum of money as their life cover as compared to endowment
plans. For instance, for an annual premium of INR10k, one can get a higher sum
assured in case of a term plan as compared to endowment plans
· Longer sustainability - In case of untimely demise, the sum assured
by a term plan insurance will sustain the family for a longer time period. This
follows the earlier pros where it was established that term plans provide a
larger sum as life coverage and hence the longer sustainability.
· Take better care of
dependants than any other insurance policies
Cons
· No other benefits can
be obtained apart from the death benefit. The insurance holder can only get the
benefit if he expires within the policy period. If, however, his demise occurs
a few days after the policy expires, he gains nothing of it. Of course, this is
applicable only in case there are no additional riders attached to it.
· Term insurance plans
do not usually come with liquidity benefits. This means in case of any
emergency, you would not be able to withdraw any money from your insurance
corpus.
Endowment plan
Pros
· Insurance plus investment – Endowment plans are looked upon as both
insurance and insurance plans. This is because of the maturity benefit they
offer along with the death benefit. In case the policyholder outlives the term
of the policy, then the sum assured will also be provided to him or her as a
maturity benefit. Term plan insurances are devoid of such clauses and hence
cannot be termed as an investment.
· Offers Liquidity- God forbid you to face an emergency situation during your
policy tenure, where monetary provisions would primarily benefit you. Your
endowment plan secures that by allowing liquidity benefits. A particular part
of the money you have paid as an insurance corpus can be withdrawn in such
emergency scenarios. The corpus, as a result, will reduce, subsequently leading
to lower returns on maturity.
· Offers scope for future savings – Plans such as child education plans or
retirement plans are considered endowment plans as they provide scope for
future savings for the policyholder. If your objective is to save using life
insurance, endowment plans are your go-to thing.
Cons
· Higher premium rates – As mentioned earlier, endowment plans come
with a high premium value as compared to other insurance plans. An endowment
plan ensuring 50 lakh INR would require you to pay twice or thrice the sum that
term insurance would require you to pay.
· Market dependency – The sum assured by an endowment plan depends on its performance
in the market. This is even more applicable when it comes to a participating
plan. Hence, it might occur that the sum assured beforehand might not match the
sum received at the end of maturity.
Comparison Table
Feature |
Endowment |
Term plan |
Premium amount |
Higher compared to
other plan |
Lower compared to
other plans |
Sum assured |
Lower than term
plans |
Much higher than
endowment plans |
Liquidity benefits |
Offered in case of
emergencies |
Not offered under
any scenario |
Maturity benefits |
Provided as per
insurance policies. |
Not provided. Only
death benefits provided. |
Works best as |
Savings scheme such
as child plan or retirement plan |
Death benefit
provider for dependants |
Market dependency |
Depends largely on
the market performance especially for participating plan |
Does not depend on
the market performance |
Investment (approx
annually) |
12,500 INR |
7500 INR |
Return after 25
years |
20 lacs INR |
50 lacs INR |
Why choose the term
plan instead of the endowment?
When it comes to insurance, it is a good
practice to not mix and combine it with other investments and seek a way to
grow your money. We would always advise to separate your investments from your
insurances. Any financial goal that you have must be tended to with appropriate
investment strategies that are not linked with your insurance. According to
this view, we would say that term plan insurance gets the edge above endowment
plans as it values this separation requirement.
The issue with endowment plans is that their
returns are connected to the way the market is moving. Hence, there is no
guarantee of an assured sum when it comes to endowment plans. In many
instances, it has been observed that the sum received is way below expectations
in case of many low-performing endowment plans. Add to that; endowment plans
are associated with the higher return value. It adds an additional burden on
your back.
Term plan insurances are beneficial in these
aspects as they separate your insurance from your investment. They are pure
insurance strategies that cover your dependents financially in case of their
untimely demise. The premium paid is also much lower than endowment plans, and
as per investment experts, the returns reaped effectively are much higher when
it comes to buying term plans as insurance and investing the additional money
that would have been required had it been an endowment plan in other investment
strategies.
Having said that, every individual must have
their own financial goals and subsequent planning as the determining factor
behind which insurance plan he or she should avail. If the purpose is only to
avail of financial protection, then we advise a pure term insurance plan for
you. If you have investment initiatives as well, we would still advise you to
opt for term insurance for securing your dependents and then browse other
investment options that do not concern insurance.
Why should we buy term
plan insurance?
We have already said a lot about why we should
choose the term plan but allow us to emphasize it a bit more. Let us get into
each one of those benefits one by one.
- Under section 80C, term plan
insurances offer tax exemption to the policyholder.
- Term plans provide the lowest
premium rates available for life insurances in the market.
- The sum assured is higher than
any other insurance plan in case of term plan insurances.
- Term plans are available with
additional riders and add-ons that provide additional benefits such as
accidental death coverage and critical illness benefits. Your premium
increases due to them.
- Pure death benefit allows your dependents
financial stability that helps them get out of a monetary crisis after
their beloved one passes away.
When should we buy
term plan insurance?
Now that we have established the why, let us
come to the next important question, when? The age of the policyholder might be
one of the most determining factors while deciding to buy a term plan
insurance. This is because the age significantly dictates the premium amount
you have to pay for the insurance. Young people benefit the most from buying
term plan insurances as their cost of the premium is the least for the same
amount of death benefit. However, he has to pay that premium for a longer
amount of time, the fact that the premium for term plan insurance does not
increase with time. Hence, the premium you pay today stays the same as you age,
even when inflation causes the value of money to depreciate.
Moreover, if you incur debts at a young age
that needs to be paid off as you grow older, then opting for a term life
insurance will help your dependents pay off that risk when you are not there.
As you grow older and enter your 30s, you start getting associated with
multiple responsibilities such as home loans, vehicle loans, and other
long-term commitments. If you are the sole breadwinner for your family, then
your responsibility multiplies manifold. In such scenarios, it is imperative
you buy term plan insurance for yourself as soon as possible.
The 40s and 50s are better times financially
with respect to debts and responsibilities. But your focus shifts towards
children’s education, health plans, and retirement benefits. This requires a
large monetary corpus and hence a suitable term plan. In case you have missed
buying one in your 30s, it’s never too late to get one.
Keep in mind that age plays a vital role in
determining the insurance premium you end up paying. Do not stick to
assumptions that you are too young to buy term insurance, and you are healthy
enough for one. Also, it’s never too late to get yourself one.
How and where you
could get the right life insurance?
Nowadays, buying a term insurance plan has
become easier. You can quickly get insurance plans online. Many insurance
companies such as hdfclife, iciciprulife, max life insurance, etc. provide some
of the best term insurance plans. All you need to do is visit their company
website. There you will be asked to enter the sum and the policy term. Based on
the information, you will have to choose the premium paying term. The next step
is to make the payment, and once the payment is made, you will receive a soft
copy of the policy.
Pros and cons of
buying online or offline
Buying a term
insurance plan offline.
· Pros
The agent will always be there to get all the
things done for you. The agent will handle all the legal formalities and
documentation works. Getting the term insurance plan offline can ensure a
higher value.
· Cons
There is always a probability of fraud because
you are not transparent with the Insurance company.
Buying term insurance
plan online
· Pros
Online term plans are flexible compared to
offline ones. You get a better range of options, and the settlement ratio is
higher. It also diminishes the risks of fraud. All you need is a computer with
a stable internet connection and your card to buy an online term insurance
plan.
· Cons
You have to bear all the hassle, including
legal documentation.
What should be the
term in years of your insurance?
We all know that term insurance plans are
affordable. It all depends on your choice. If you have a tight budget, you can
go for a shorter duration, say, a 20-year term policy.
Smoker category in
term insurance
Many insurance companies are now offering term
insurance plans for smokers. The smoker category is being divided into –
Preferred smoker, Typical smoker, and table rated smoker. A smoker can get
coverage up to 75 years with a maximum term of 30-40 years.
When and how the
medical test performed? Is a medical test compulsory?
Yes, medical tests are compulsory as it helps
the company to estimate your risk profile. Two cases determine when is the term
insurance medical test required. One is when you are aged more than 35 years,
and the other is when you choose a sum assured of ten lakhs. But it varies from
one company to another. The medical test includes checking your blood pressure,
weight, height, urine analysis, lipid profile, blood count, hemoglobin levels,
electrocardiogram, and blood sugar levels.
What amount should you
have insurance for, and how that amount is calculated?
It is advisable to buy a term insurance plan
six to 10 times the amount of your annual salary. The term insurance amount
calculation is straightforward. For example, if you are aged between 25 to 35
years, you need to add 15-18 times to your current annual income. This value is
summed up with any outstanding debts or loans.
Points to remember
while filling the application form for insurance
One should keep in mind a few things while
filling out an application form for term insurance. They are:
- Buy a term insurance policy
plan only till your retirement age.
- Never opt for buying single
premium policies.
- Buy the basic version of the
term insurance plan.
- Do not hide your health
information or your family’s health history.
- Do not over-analyze and delay
your decision.
- Add your nominee name in your
application form.
- Fill details about your
existing insurance policies.
Reasons for rejection
of claims
Some of the common reasons for rejection of
claims are as follows:
- Incorrect information provided
in the application form
- You are not updating your
nominee information.
- No disclosure about your
medical history
- Refraining from medical tests.
- No information about your old
insurance policies
How to claim your dear
one’s insurance after their death
To claim your dear one’s insurance after
death, you need to follow the below steps:
- Go through the life insurance
claim and read the policy.
- Inform your insurance company
- Submit the intimation form
- Complete all the required
documentation procedures
- Select the pay-out option.
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