Confused about whether to opt for term insurance or an endowment policy? Not sure about the differences between them? When you received your first salary, you might have found yourself in a dilemma about where to invest your savings. Everyone desires safe investments with decent returns, compared to mere savings accounts and fixed deposits.
Today, I’ll delve into all aspects related to term insurance and endowment policies. Additionally, I’ll assist you in making an informed investment decision and financial planning. It’s crucial, especially for young professionals like you, to invest in policies for future financial security for yourself and your family. This forms an integral part of financial planning.
Let’s understand that while there are numerous types of policies for investment, two types stand out – Term insurance and Endowment policy, widely embraced by the middle class in India. I’ll elaborate on each policy below.
Few Definitions
Firstly, let’s familiarize ourselves with a few terms to ease comprehension.
- Sum Insured: Sum insured denotes the maximum amount an insurance company will disburse under a specific policy. For instance, if you insure your life for ₹50,00,000, that becomes the sum insured. Think of it as the maximum coverage your insurance offers.
- Bonus: Bonus constitutes an additional reward that insurance companies extend to clients under specific circumstances. It’s akin to a prize for maintaining a good record or refraining from claims. For instance, if you hold car insurance and refrain from filing claims throughout the policy duration, you may receive a bonus, such as a discount on subsequent premiums or an enhanced coverage amount at no extra cost.
- Premium: When you purchase and sustain an insurance policy, you pay the insurance company a “premium.” It represents the cost of your insurance coverage. For instance, if you procure health insurance, you remit a fee to the company periodically to safeguard yourself. The premium amount typically hinges on factors such as the type of coverage, sum insured, the insured person’s age, and their health condition.
Let’s avoid confusion with general insurance offerings by companies, as we focus solely on term insurance and endowment policy discussions here. For general insurance queries, I’ll address those separately, so do subscribe to our email list for updates.
Both term insurance and endowment policies offer life cover plans, yet they exhibit slight disparities.
About Term Insurance
Term Insurance – “Life Cover Only“: With term insurance, if an unfortunate event occurs, your family receives a substantial amount equivalent to the sum insured. Term insurance premiums are relatively lower as they do not yield returns on investments but solely provide life cover, disbursing payments to your nominee post your disability or demise.
Let me simplify with examples. Suppose you seek a term insurance cover of Rs. 1 crore until the age of 85 years. If any unfortunate event happens with you, your family receives Rs. 1 crore outright. For term insurance, Premiums typically range between Rs. 10,000 to 18,000 yearly, contingent on your age, with lower premiums for early enrollment.
Many insurance companies provide flexibility to choose the premium payment duration—whether over ten years, until the age of 60, until your demise, or till age 85, with a single annual premium. Your insurance agent can furnish comprehensive details on this. Websites like Policybazar.com facilitate plan comparisons among popular insurance providers, aiding in premium duration and amount decisions, alongside tax-saving opportunities.
Note: if you remain insured till age 85, any event happens after the term period, the term insurance will be void means you will get nothing. Hence, take deliberate decisions.
But, certain insurance companies now offer premium return options (return on investment) wherein clients receive refunds if no incidents happen during the insured period. Such add-on features increase premiums but do not accrue interest on investments, necessitating wise investment decisions.
Advantages of Term Insurance: Despite the absence of investment returns, term insurance premiums are nominal, starting from Rs. 1000 per month or may be less. Given the numerous liabilities middle-class individuals shoulder, term insurance assures substantial coverage, assuaging concerns regarding future financial obligations will come to your family.
About Endowment Policy
2. Endowment Policy: Characterized by “Life Cover with Savings“. Endowment policies usually span 20-25-30 years, offering sum insured with bonuses after term completion with Life cover of 3x to 5x of sum insured.
For instance, suppose you procure a policy entailing 25-30 years of life coverage, with premium payment obligations spanning 20-25 years. Post the term, you receive additional returns alongside the sum assured, termed as bonus, the specifics of which vary with policy type.
Note: Endowment policies necessitate higher annual premiums compared to term insurance due to investment allocation by companies, coupled with life cover provision.
No one can determine precise bonus amounts vis-a-vis sum insured on endowment policy specifics and premium needs to pay. It’s imperative to scrutinize terms and conditions wisely before making decisions.
What to choose:
As for the optimal choice, it’s a matter of personal circumstance.
I recommend considering both, if feasible. Term insurance entails premiums ranging from Rs. 10,000 to 18,000 yearly, payable until the insured term concludes (e.g., age 75 or 85).
Endowment policy may necessitate annual premiums of up to Rs. 60,000 for 15-20-25 years, with post-term returns can be used for purposes like children’s education, healthcare, or marriage expenses, serving as a financial safety net for the future.
Compare plans on Policy Bazaar
While refraining from promising investment returns on endowment policies, I advocate meticulous consideration and thorough calculations of return on investment to avoid undue promises of returns.
With a low budget, Opt for term insurance for family security and with small savings every month, consider investments in mutual funds or stocks, where you can get better returns compared to conventional savings plans, provided you possess the requisite knowledge.
Each has their own pros and cons. Investment options can vary and cannot be compared to insurance you take as the purpose of every investment is different. So, have a look at different aspects, collect knowledge, scrutinize terms and conditions and make decisions.
Even if you’re unfamiliar with stock market or mutual fund investment dynamics, peruse my blog – finyojana.com, for further insights and updates.
