How are endowment plans different from term plans?

Though both are life insurance policies, there are some differences between endowment plans and term plans. This article examines the differences.

Taking a life insurance plan has become important when life has become so uncertain. But you are faced with the prospect of deciding between two kinds of life plans: the endowment policy and term plans. Which one should you choose?

What is an endowment plan?

An endowment plan is a traditional life insurance product combining the benefits of life coverage and regular savings. On maturity, the plan pays a large corpus to the insured person.

What is a term plan?

A term plan is a life insurance product that has a large sum assured and affordable premiums. However, there is no maturity benefit in this plan.

So how are endowment plans different from term plans?

Though they are both life insurance products with many similarities, endowment plans differ from term plans in these ways:

* Insurance v/s investment: While a term plan offers a pure insurance component in terms of life coverage, the endowment policy also offers an investment component. Most traditional endowment policies are based on regular savings plus life coverage. However, newer endowment plans may be market-linked to offer higher returns on the premiums paid. This feature is not present in term plans.

* The premiums are different: Term plans are arguably the most affordable insurance instrument today. The premiums are quite low for a high sum assured. For example, if you were to consider the premiums paid for a sum assured of Rs 2 crore, then the premiums for term plans would be much lower than those for endowment plans.

* Maturity benefit: As mentioned earlier, endowment policies benefit the plan holder with a maturity benefit in case they outlive the plan tenure. Many people who take endowment plans do so for the maturity benefit – this is absent in a term plan, which offers the death benefit only. The premiums paid are not returned in case the plan holder outlives the term plan.

* Sum assured: The sum assured for term plans may be comparable to those offered by endowment policies, though the premiums for the latter will rise proportionately in relation to the sum assured amount.

* Liquidity: In case you are in need of money, you can borrow a loan against the endowment policy. You may not be able to borrow against the term plan.

So which is better for you?

You can decide whether to opt for an endowment policy or a term policy depending upon how much premium you wish to invest, whether a maturity benefit is important to you, and whether you are willing to ride out the risk of market performance in case of a participating endowment plan. Those who wish to take insurance to get life coverage, get a corpus to realise a future goal and also secure their family’s future should opt for an endowment plan.

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