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Articles 2439 views January 17, 2019
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Term Insurance Vs. Endowment Plan: Difference
Financial illiteracy and ignorance of investment products have often led many people to choose the wrong financial instruments that are not in sync with their needs. Confusion betweenterm insurance products and endowment plans is common as customers continue to misconstrue their features and associated benefits.
While both these kinds of plans are sold bylife insurance companies in India, there is a stark difference between how these plans work for customers. While term insurance acts to financially secure your nominees in the event of your sudden death, endowment life insurance plans cater to the needs of people who are looking to invest their money apart from seeking an adequate protection cover.
While the essence of buying a term insurance plan can be understood by the nominees only on the sudden death of the policyholder, paying for endowment life insurance policies help you to earn on the money invested in addition to acting as a protection cover in your absence.
The following table helps to understand the difference between two important life insurance policies, viz., level term insurance and endowment life insurance policies.
| Difference Parameters | Term Insurance | Endowment Plans |
|---|---|---|
| Nature of Cover | Financially secures against risks on sudden death, disability or disease | Combines the merits of investment and insurance |
| Extent of Cover | An essential financial tool that acts as a protective cover against death | Suggested for those who wish to see their money grow apart from seeking a protective cover |
| Amount of Sum Assured | The death payout is 10-12 times the yearly premiums paid | The sum assured amount is not much. However, customers can benefit from sufficient growth in the money invested |
| Availability of Maturity Benefits | There are no maturity benefits for term insurance policyholders | The maturity benefits are available at the end of the policy term |
| Nomination Benefits | Term insurance is bought with the idea to secure the future of dependents (also called nominees) | The policyholder gains from the maturity amount at the end of the policy period. A moderate amount of insurance cover is given to the nominee in the event of the policyholder’s death |
| Premium Charges | Life insurance companies charge nominal premiums towards term insurance plans | Premium charges are higher as the amount is invested to earn returns while also ensuring an appropriate insurance cover |
Concluding Arguments About Term Insurance Vs. Endowment Plan in India
You must consider buying term insurance only if you realize that your dependents will be bereft of the necessary monthly income on your death. Also, people who have taken loans (business, personal or home loans) must buy a term insurance plan with an adequate amount of sum assured so that their nominees may pay off the lingering liabilities without having to bear the brunt of the resulting financial burden. Customers must choose the sum assured after considering the extent of loans taken, nature of contingent liabilities in future, liquidity of the existing assets and financial instruments. However, the thumb rule also says that the death benefits must be equal to 10-12 times your yearly salary.
Endowment life insurance policies must be preferred by those who wish to see their money grow. Though the extent of growth may not be similar to market-linked returns as endowment plans invest in conservative or risk-averse instruments, customers can still benefit from the compounding effect of the investments made. The availability of the nominal insurance cover adds to the existing benefits that insurance companies promise. High Return on Investment (ROI) makes up for the lack of adequate insurance cover and, hence, these plans must be sought only after you have ensured enough financial security to take care of your loved ones in your absence.