A common dilemma is whether to buy a term plan or an endowment policy. This is because you may not have a clear understanding of the different types of insurance policies that are available.
Firstly, understand that both these types are traditional life insurance term plans. Both are beneficial in availing of life cover and help in reducing your tax liability. Nonetheless, there are some differences between these two types of policies.
Here are the basic differences between term plans and endowment plans:
- The premium
When you talk with an insurance agent, likely, he may not be willing to promote a term plan. Is this because endowment plans are better than term policies? No, agents do not earn higher commissions on term plans. A term plan is the most affordable way to procure more coverage. If you compare the same sum assured with an endowment policy, the premium is significantly higher.
2. The sum assured
In addition to the premium difference, the sum assured also varies based on the type of plan you choose. Term plans allow you to choose a higher sum assured based on your income and liquidity situation. In comparison, if you want to procure a similar coverage through a regular endowment policy, the premium will be much higher. Additionally, term plans pay the policy benefits only to your beneficiaries in case of something unfortunate happens to you during the period. Endowment plans pay the death benefits in an unfortunate event; however, if you survive the policy term, you also receive the maturity benefits.
3. Additional features
Although there are differences between the endowment plan vs. term plan, both these offer several riders. To avail of enhanced coverage through the riders, you need to pay an additional premium. Certain riders are available only with term plans while a few others may be clubbed only with an endowment policy. A few of the common riders include accidental death benefits, premium waiver, and critical illness cover. Moreover, both these plans are eligible for tax benefits under section 80C of the Income Tax Act. The policy benefits are also tax-free under section 10(10D); however, exemptions are greater for endowment plans when compared to term plans.
What should you buy?
A detailed understanding between term plan vs. endowment plan shows that each has its pros and cons. Here are some things to consider while choosing which policy to buy:
- Term plans offer significantly lower premiums when compared to endowment policies
- Endowment policies offer both death and maturity benefits while term plans pay only death benefits to your beneficiaries
- Term plans do not allow any withdrawals in case of an emergency fund requirement; endowment plans allow you to partially withdraw a certain amount of the accumulated corpus offering more versatility
If your family depends on you for their financial well-being it is important to buy an online savings plan. Procuring their financial stability in your absence through a term plan is recommended. However, if you want to build a corpus over the long-term, an endowment policy may be beneficial. Consider your requirements and financial situation while making your decision.