Endowment Plan vs Term Plan: Key Differences, Benefits, and Which to Choose
- Bhanu Kiran
- May 7
- 3 min read
Updated: May 10
Life insurance isn’t just about preparing for the worst but about making smart choices for the future. Some plans focus purely on protection, while others try to blend insurance with savings. The key is knowing what you actually need, not what sounds good on paper. That’s where most people get confused, especially when choosing between a term plan and an endowment plan. To make it simpler, let’s dissect each of them - endowment plans and term insurance plans - and understand the key differences between them.
What is a Term Insurance?
Term insurance is designed to offer financial security to your dependents in case of your untimely death during the policy duration. It focuses solely on providing a safety net, without attaching any investment or savings component.
Key Features of Term Insurance:
High Coverage at Low Premiums:
Term plans offer substantial life cover at relatively low premium costs, especially when purchased at a younger age.
No Maturity Benefit:
If you live through the entire term, the policy concludes without any return. This design helps keep premiums affordable and the plan easy to understand.
Fixed Premium:
Once a term policy is purchased, the premium remains fixed throughout the premium payment term and does not increase with time.
Fixed Policy Tenure:
You can select a coverage period that aligns with your financial responsibilities, commonly until age 60 or 65.
Tax Benefits:
Premiums paid are eligible for tax deductions under Section 80C, and the death benefit is exempt under Section 10(10D) of the Income Tax Act.
What is an Endowment Plan?
An endowment plan guarantees a lump sum payout, either if the policyholder passes away during the term (death benefit) or upon outliving the policy (maturity benefit). This dual benefit makes it attractive to individuals who want insurance coverage along with a lump sum after maturity. However, the low Internal Rate of Return of the endowment plan makes it a little unattractive.
Key Features of an Endowment Plan:
Payout:
Whether the policyholder survives the term or passes away during the term, an endowment plan ensures a guaranteed payout.
Higher Premiums:
Because of the combined protection and savings structure, endowment plans usually come at a higher cost than term insurance.
Low Internal Rate of Return (IRR):
Despite the guaranteed benefits, endowment plans tend to generate lower returns compared to other long-term investment instruments like mutual funds or PPF, which makes them less suitable for wealth creation.
Endowment Plan vs Term Plan: Key Differences Explained
While both options offer coverage for life, their financial structures and benefits differ significantly. Take a look at the table below to understand the key differences between an endowment plan and a term insurance plan.
Feature | Term Plan | Endowment Plan |
Purpose | Pure risk cover to protect dependents | Insurance + savings for future financial goals |
Payout Condition | Only if the insured passes away during the term | Guaranteed payout on death or survival |
Maturity Benefit | No maturity benefit | Paid at the end of the policy term with bonuses |
Premium Cost | Low, affordable | Higher compared to a term plan |
Returns | No returns, only death cover | Modest returns |
Internal Rate of Return (IRR) | Beneficial, if the balance amount is invested in other instruments like mutual funds | Typically ranges between 4%-6%, depending on bonuses |
Tax Benefits | Section 80C & 10(10D) eligible | Section 80C & 10(10D) eligible |
Flexibility | Highly flexible in coverage and riders | Limited flexibility |
Suitability | Ideal for income protection | Suitable for conservative savers with fixed goals |
Investment Risk | None | Low (insurer-managed with guaranteed elements) |
Policy Complexity | Simple and easy to understand | More complex due to dual components |
Also Read:
If you're looking to dive deeper into the math behind the combination of life insurance and investment options, check out our recent study:
It offers a detailed comparison and highlights the long-term financial impact of combining these financial tools.
Frequently Asked Questions
Is a term insurance policy a smart choice?
Term insurance offers an affordable way to protect your family’s financial future, but it doesn't include any savings or investment component. It’s suitable for those seeking high coverage at lower premiums.
How many years is best for term insurance?
What are the disadvantages of an endowment policy?
Can I sell my endowment policy?
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