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Comparison of Term Plan Insurance With Endowment Insurance Plan

 



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:

  1. Go through the life insurance claim and read the policy.
  2. Inform your insurance company
  3. Submit the intimation form
  4. Complete all the required documentation procedures
  5. Select the pay-out option.

 

 

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