Purchasing life insurance is a crucial financial decision that impacts both you and your loved ones. It can provide you with peace of mind, security, and protection in case of any unforeseen events. But with so many types of life insurance products accessible in the market, how do you choose the right one for your needs and goals?
Today, we will compare and contrast two of the most popular types of life insurance plans: term insurance and endowment policy.
Term Insurance: What Is It and How Does It Work?
If you are wondering what is term insurance, then a term plan is a pure risk cover plan that provides financial protection to the nominee in case of the policyholder’s death during the policy term. It is the simplest and cheapest form of life insurance, as it only covers the risk of death and has no investment component.
The benefits of term insurance are:
- High sum assured: It offers a high sum assured, up to 20 times your yearlong income. This can ensure your family’s financial needs are handled in your absence.
- Low premium: It has a low premium, as it only covers the risk of death and does not have a savings or investment element. You can get a term insurance plan for as low as Rs. 500 per month.
- Tax benefits: Term insurance premiums are eligible for tax reduction under Section 80C of the Income Tax Act, up to Rs. 1.5 lakh per annum. The nominee’s death benefit is also tax-free under Section 10(10D).
- Flexibility: You can choose the policy term, sum assured, premium payment mode, and riders. Thus, you can customise your term insurance plan according to your needs and preferences.
- Simplicity: It is easy to understand and buy, as it does not involve complex calculations or terms and conditions. You just pay the premium and get coverage for the policy term.
The drawbacks of term insurance are:
- No maturity benefit: It does not provide any maturity benefit, which means that if you survive the policy term, you will not get any money back. You will lose the entire premium paid.
- No investment component: Term insurance does not have any investment component, which means that it does not help you build any wealth or savings for your future goals. You will only get the benefit in case of your death.
Endowment Policy: What is It and How Does It Work?
An endowment policy combines insurance and investment that provides protection and savings to the policyholder. It is a long-term plan that pays a lump sum to the policyholder on maturity or to the nominee on death, whichever is earlier.
The benefits of the endowment policy are:
- Guaranteed returns: It offers guaranteed returns, which are fixed when buying the plan. You will get the sum assured plus any bonus or loyalty additions on maturity or death.
- Bonus: The endowment policy participates in the insurance company’s profits and shares a part of them with the policyholder as a bonus. The bonus is declared every year and added to the sum assured. Depending on the type of plan, the bonus can be simple or compound.
- Maturity benefit: It provides a maturity benefit, which is the sum assured plus bonus plus any other benefits, such as loyalty additions or terminal bonuses. You will get this amount if you survive the policy term.
- Loan facility: This facility lets you to borrow against the policy in case of a financial emergency. You can borrow up to 90% of the policy’s surrender value, subject to certain terms and conditions.
The drawbacks of the endowment policy are:
- Low sum assured: It offers a low sum assured, which may not be sufficient to cover your family’s financial needs in case of your death. You may need to buy additional term insurance to get adequate coverage.
- High premium: This plan has a high premium, including insurance and investment components. You may have to pay a large amount of money every year for a long period, which may affect your cash flow and savings.
- Low returns: This policy has low returns, as it invests in low-risk and low-return instruments, such as government securities and bonds. The expenses and charges of the insurance company also affect the returns. You may get a lower return than the inflation or market rates.
Conclusion
Choosing the right life insurance plan is not a one-size-fits-all decision. It depends on various factors, such as age, income, expenses, liabilities, dependents, risk appetite, and investment horizon. You need to assess your financial situation and goals and contrast the features and benefits of term insurance and endowment policy before choosing.