Term policy and endowment policy

“A life insurance policy is something that provides a dedicated sum of money on the demise of the policyholder or after a certain period of time.”

To cover the risk of pre-mature death, accidents and illnesses is one of the most important financial decisions a person can make. The risk that the breadwinner may face can rupture the financial well-being of the entire family.

Like other types of insurance, life insurance also gives protection to the insured against the unknown risk associated with life. It is like airbag in the car, you hope never to use it but it gives you peace of mind to know it’s there. Same, In the life insurance you are paying for peace of mind that your family is financially taken care in any event of your sudden death.

It is a contract in which an individual pay a premium over a period against the financial coverage by an insurance company in case the policyholder passes away during the policy tenure. There are two major types of life insurance—term policy and endowment policy.

Endowment Policy 

This type of policy gives policyholder benefit of protection as well as savings. In this policy insurance provider collects premium from the insured for a certain period of time and at the end of the policy term or death, insured or his beneficiary get maturity amount. If the insured is breadwinner, this policy will not adequate for covering all the expenses after his death but this policy can be used as good investment tools. This policy cultivates a sense of regular savings and financial discipline in an individual which will eventually build a corpus at the end of the maturity to fund the expenses like child’s higher education or marriage or buying a house or a dream vacation or funding the retirement.

Some of the notable benefits of endowment policies are listed as follows:

• Dual Benefit: Endowment plan provides the dual benefit of savings cum insurance coverage. Insured can get sum assured and bonuses both in case of the death of the policyholder before the policy matures and also in case of the policy matured.
• Tax benefits: Tax benefit can be availed on both premium payments (under Section 80C of Income Tax Act 1961) and the final death or maturity payouts (under Section 10(10D) of Income Tax Act 1961).
• Premium Payment Frequency:The premium payment is very flexible in case of an endowment policy, the policyholder can choose monthly, quarterly, half-yearly or yearly payment.

• Additional Bonus Facility:This policy gives bonus to the policyholder consist of terminal bonus, revisionary bonus and additional bonus which include profit of the company for the yearand is accumulated in the policyholders’ account every year until maturity or death.
• Rider Benefits: Policyholder can add riders such as accidental death, total disability or critical illness to the policy to increase the coverage of life cover. Some policies also give you premium payment waiver in case of critical illness or permanent disability.
• Low Risk:  The life insurance policy providing company invests the most of collected corpus in the low risk investment option such as debt market.

Term policy

Term insurance is a pure life insurance policy taken for a certain period or term. In case of unfortunate death of a policy holder, the sum assured is paid to the beneficiary. It gives you very high cover at very low premium as compared to endowment life insurance policies. The term insurance gives you cover of 8-10 times of your annual income which is necessary for your family in case of your uncertain demise.

It is like the car insurance premium you pay, you do not get any benefit of it if the event that it is taken for, does not occur and no claim made.What you buy in term policy is peace of mind and risk cover. In its purest form term insurance covers risk only for one year and can be renewed every year by paying premium.

The Benefits of term insurance are as follows:

• Financial Stability:  In today’s world financial stability is the most important for the individual as well as family, the death of the person can turn the financial life of family upside down. In case of death of policyholder, term life insurance provide huge sum assured which makes life easier for the family members.
• Simplicity:The term insurance is easy to understand as there is no component of savings in the policy. What you pay for is just a simple life cover to mitigate the risk of untimely demise for a specific period of time.
• Tax benefit: The premium upto 1.5 lakhs per annum is exempted under section 80C of the income tax act,1961 and the death benefit is fully exempted under the provisions of sec10(10D), income tax act,1961. With the help of term insurance low premium policyholder can invest the remaining amount in other tax free investment options like PPF, ELSS which give him extra income edge.
• Massive Coverage: In the starting phase of young life, we face some financial problem but covering life is also important for easy life of parents and spouse after an event. The Term insurance gives younger person substantial coverage against their life at immediate low cost.
• Low premium:Unlike endowment policy, term insurance does not provide maturity benefits and other benefits rather than death benefit, the term insurance plans offers low premium for high coverage.The early with the help of online medium, term insurance offers further low premium due to the absence of agents and middlemen.
• Riders: Along with death cover to the insured, most term life insurance plans offer some additional benefits at low cost, known as riders which enhance the policy’s benefits. You can choose riders like accidental coverage, critical illness coverage, return of premium etc. at a little extra premium cost.
• Claim settlement: Due to low claim rate, the claim settlement is quicker in case of any emergency. As research shows, 99% of times claims are approved from the company.
   

Endowment Policy versus Term Policy

Why you should prefer term plans over endowment

It is compulsory to understand the difference between insurance and investment, they are very different product.First is a risk management exercise to protect family after death where as latter is for wealth creation.

In the term policy, premium you pay is less than the endowment policy premium which you can use to create a monthly SIP on an equity fund which will give you 12-15% return. Consider the table below for clear picture:

Conclusion

Both are very different offerings - they are like chalk & cheese. Term insurance is a pure risk cover at low premium which is an absolute must for every individual who is breadwinner of the family where as endowment policy give policyholder dual benefit of savings as well as investment for his long term financial goals.

So, in a nutshell if your family is dependent on you financially it is important to have term plan to have more coverage but, if the risk cover does not matter much to you and your focus is saving, you may opt for an endowment plan.