Difference between Term Insurance and Endowment Plan

• 23rd Jul 2019
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While choosing a life insurance cover, you may often be in a dilemma between an endowment plan and a term plan. This is common because like most people you may not understand the different types of life insurance plans.

Firstly, both these types of plans are traditional life insurance policies. Moreover, these provide comprehensive life coverage while offering tax advantages. Nonetheless, there are certain differences between these two types of insurance plans.

Before looking at these distinctions, you must begin by understanding what a term insurance plan is and what does an endowment plan mean.

When you opt for a term plan, the insurance benefits are available to your beneficiaries only if something unfortunate happens to you during the policy period. In comparison, endowment plans offer death benefits to your beneficiaries in case if an untoward event takes place during the policy term. In addition, if you survive the policy term, you receive maturity benefits too.

Here are the six major differences between term insurance vs. endowment plan:

1. Investment

Term plans are pure life covers with no additional benefits. On the other hand, endowment plans combine insurance and investment. Therefore, if you survive the policy term, the endowment policy pays the corpus accumulated during the years.

2. Premium

Term plans offer higher sum assured cover for an affordable premium. In comparison, if you want to avail of the same coverage under an endowment policy, you will have to pay a much higher premium. Additionally, you have to pay more to include riders along with the basic coverage, thereby increasing the premium cost.

When you buy a term plan, the insurance company pays the benefits only in case of an unfortunate incident during the policy period. Therefore, the risks for the insurer are lower, which reduces the premium cost. Conversely, the insurance company pays death benefits in an endowment plan as well. However, the company also pays maturity benefits if you survive the policy term, thereby increasing the cost to the insurer. Hence, a higher premium is levied on endowment plans.

3. Sum assured

Depending on the type of life insurance policy chosen, the sum assured varies. Most insurers provide you with the flexibility of opting for a higher coverage based on your income when you invest in a term plan. However, to procure a higher coverage under an endowment policy, you need to pay a huge premium that may be beyond your financial capability.

4. Policy objective

An important difference between term life insurance vs. endowment plan is the policy objective. Term plans offer only death benefits to ensure your family members are able to meet their financial obligations such as regular expenses or monthly installments without facing difficulties.

In comparison, endowment plans offer death benefits to your loved ones. However, these policies also allow you to invest and meet your future financial goals.

5. Riders

Both term and endowment plans offer additional coverage through riders at an extra cost. However, some riders are available only with term plans while others may be available only with an endowment plan.

6. Payout choices

Your beneficiaries may receive the death benefits either as a lump sum payout or in installments as per your chosen option. However, endowment policy benefits are available only as a lump sum either on demise or on maturity.

It is recommended that you assess your requirements to decide on which of these policies suit your personal needs.

- A Consumer Education Initiative series by Kotak Life