Term Plan vs. Endowment Plan: Which Life Insurance Option Should You Choose?

Selecting an appropriate plan is important for the financial future of the family members. 

Before finalising a plan, one must consider the requirements of the family members, which means is only protection required or savings component is also the need of the hour. There are two most searched plans available in India, namely Term Plan & Endowment Plan, which are different types of life insurance plans, but might look the same, but are different in reality. Where term plans are basic life protection plans, endowment plans, on the contrary a combination of insurance & savings. To make an informed decision, let us understand them in detail.

What is a Term Plan?

A Term plan is the most common type of Life Insurance, which offers financial security to the family members if the policyholder dies unfortunately. But, there is no maturity benefit in case of the policyholder’s survival. 

What is an Endowment Plan?

An endowment plan is a kind of life insurance plan which includes a lump sum payment either on the policyholder’s death or maturity of the plan. It best suits those who are futuristic & want to look for long-term investment options & are planning for some future events, such as their retirement, their child’s marriage, etc. 

This means that in case of sudden demise of the policyholder during the policy tenure, the entire sum assured & bonus accumulated, if any, will be paid to his/ her beneficiaries. Also, this plan entitles the policyholder to receive the amount of sum assured along with the bonus accumulated, if any, if he/ she survives the policy.

Difference between Term Plan & Endowment Plan

Provided are the differences between a Term plan & an endowment plan:

Pros & Cons of a Term Plan

1. Pros

• This plan offers a high insurance cover at a very low cost.

• In case of the sudden demise of the policyholder, the beneficiaries receive a huge sum assured.

• This plan is quite flexible in terms of choosing a tenure, i.e. short-term or long-term.

• This plan allows you to add additional riders according to your preferences & budget to enhance the coverage at some added cost.

2. Cons

• This plan does not offer any maturity benefit in case the policyholder survives the policy tenure.

• This plan only offers coverage against risk, i.e. no savings component included.

Pros & Cons of an Endowment Insurance Plan

3. Pros

• This plan offers the dual benefit of insurance & investment.

• If the policyholder survives the policy, they will receive the sum assured along with the bonus.

• This includes assured returns at the time of maturity, encouraging disciplined savings. 

4. Cons

• It is quite expensive compared to term insurance.

• This plan offers a lower sum assured in comparison to a term plan.

• This plan offers average returns when compared to other investment plans.

Which Plan Should be Chosen – Term Plan or Endowment Plan?

One should look for financial objectives, risk acceptance level, & investment horizon while making a choice between the plans. Let us understand in detail:

1. Choose a Term Plan if:

• You want to get high coverage of life insurance protection at a reduced cost.

• Your priority is to provide financial security to family members in your absence.

• You hold other investment plans; a term plan can be an appropriate choice to complete your financial strategy.

• You do not want a maturity benefit, because this plan only pays in case of your death & not if you survive the plan.

2. Choose an Endowment Plan if:

• You prefer both protection for family members & savings for their future requirements.

• You are looking for a secure, stable, & guaranteed return.

• You can save regularly to achieve your long-term objectives.

• You can pay a high premium amount, as this plan includes the benefits of both insurance & investment. 

Term Plan or Endowment Plan – Which is Better?

1. In the case of Young professionals

For youngsters starting their careers, a term plan might be a better option as it offers huge coverage at a lower premium cost.

2. In the case of Married Individuals

A combination of both a term plan & an endowment plan is advisable, where a term plan will provide life coverage & an endowment plan will take care of the savings component in your absence.

3. In the case of Retirement

An endowment plan would be the Best Investment Plan for retirees as it will offer life protection along with the accumulation of wealth in the long term. This will allow you to build a retirement corpus along with financial protection to the family members. 

Conclusion

The choice between a term plan & an endowment plan will depend on your financial objectives, risk tolerance level, & investment horizon. You can also consult a financial advisor who will guide you to make an informed decision to well-aligned with your financial goals & budget.