Term Insurance + Mutual Funds vs Endowment Plans: The Math Will Shock You!

Endowment plans have long been a go-to for Indian families looking to “mix” insurance and savings. But is this combination really serving your financial goals? In this post, we’ll compare traditional endowment plans like LIC's New Jeevan Anand and HDFC’s Sanchay Plus with a far more effective strategy: A combination of Term Insurance + Mutual Funds.

What Is an Endowment Plan and How Does It Work?

An endowment plan is life insurance that pays out a lump sum on death or after a specific term (maturity), combining insurance with a savings component. These policies often come with guaranteed returns but low IRRs (Internal Rate of Return), usually 4% to 6%.

IRR is the rate at which your money grows yearly when you invest in something. Imagine investing ₹1 lakh per year for 10 years and getting ₹15 lakhs after 10 years — the IRR tells you what percentage return you earned yearly to reach 15 lakhs (7.2% in this case).

So, if an insurance plan or investment has an IRR of 5%, your money grows at 5% yearly. If mutual funds give an IRR of 13%, your money grows much faster, and you'll end up with a much bigger amount.

An Overview of How a Term Insurance Works

You pay a fixed premium annually when you purchase a term insurance policy. In return, the insurance company promises to pay a lump sum to your nominee if you pass away during the policy term. Unlike endowment plans, term insurance does not have a maturity benefit, meaning there is no payout if you outlive the policy term.

For example, a 30-year-old non-smoker earning ₹10 lakh annually can get ₹1 crore coverage for a premium amount of anywhere between ₹10,000 to ₹15,000 per year.

Leveraging the Difference in Premium Between Endowment Plans and Term Insurance

The premium difference between endowment plans and term insurance is substantial. Endowment plans typically charge high premiums for insurance and savings, often resulting in low returns. In contrast, term insurance offers pure life coverage at a relatively lower cost.

By choosing term insurance, you free up the difference in premium, which can be invested in high-growth assets like mutual funds. Let’s dive deeper into this strategy with a step-by-step breakdown.

Step 1: Analyzing Returns from Leading Endowment Plans

We calculated the cash flows and IRR for LIC and private insurers' top 5 endowment plans. Premium for 1st year is taxed at 4.5% GST, and premiums from 2nd year are taxed at 2.25% GST. We assumed the endowment policies would payout the best-case scenario as illustrated in their sales brochures.

Even though these policies promise a big payout, your money is only growing at around 3.5% to 5% per year in the best scenarios, which is relatively low, especially when inflation is around 6-7%.

Step 2: Aligning Term Insurance Plans with Endowment Policy Profiles 

Next, we collected data for India's top term insurance policies from Policy Bazaar. We aligned these term plans with the endowment plans from Step 1 — by that, we mean:

• Matching the policy term

• Matching the individual profile:

Case Parameters:

Age: 30 years

Gender: Male

Occupation: Salaried (non-government)

Income: ₹10,00,000+

Non-smoker

Education: Graduate and above

Payment frequency: Yearly

Cover amount: ₹1 crore

By doing this, we ensured that we’re comparing both insurance + investment benefits of endowment policies with the term plan + mutual fund combo on an equal footing.

Term insurance is the purest and most affordable form of life insurance.

You pay a fixed premium every year, and in return, the insurance company promises to pay your nominee a large sum of money, like ₹1 crore, if you pass away during the policy term.

 It only covers the "risk" of death — there is no maturity or return if you survive the term.

But that’s not a bad thing! Why?

Because it’s super cheap, for example, a 25-year-old non-smoker earning ₹10L+ annually can get a one crore cover for as low as ₹8,000–₹15,000 per year.

This leaves you with much more money to invest separately in mutual funds or other instruments, which can build a much bigger corpus over time.

Now let’s see what happens when we take the difference in premiums and invest it in mutual funds instead.

Step 3: Integrated Strategy to Combine Insurance and Mutual Fund Investments

Now comes the most crucial part of our analysis.

We took the difference between the high premiums of endowment plans and the low premiums of term insurance. We invested that difference in mutual funds, assuming a 13% annual return (a realistic long-term average based on equity mutual fund performance).

Here’s how we did it:

• We noted the actual premium paid for each endowment plan, excluding discounts and including GST.

• We then picked a matching term plan (regarding policy term and profile) and compared it with the endowment plan.

• The difference in premium was assumed to be invested in mutual funds every year, during the premium payment term.

• The mutual fund returns were compounded (i.e., reinvested yearly), just like a regular SIP investment, until the end of the policy term.

Results: How Term Insurance + Mutual Funds Outperform Endowment Plans

1. Mutual Fund Taxation

   ∙ Long-term capital gains (LTCG) on equity mutual funds (after 1 year) are taxed at 12.5% (including CESS).

   ∙ This tax is applied only on the gains, not the invested amount.

   ∙ Despite this, the MF + Term combo beats endowment plans by a wide margin.

2. Endowment Plan Taxation

   ∙ Traditionally, the maturity amount of endowment plans was tax-free under Section 10(10D).

   ∙ However, the new rule (effective from April 2023) says:

   If your annual premium exceeds ₹5 lakhs, the maturity proceeds become taxable as per your income tax slab (in most cases, 30%).

   ∙ All endowment policies in our study had premiums below ₹5 lakhs annually. Hence, no tax adjustment is required

This visual compares the returns from an

LIC New Jeevan Anand endowment plan with a Term Insurance + Mutual Fund strategy over 35 years. While the endowment plan yields ₹19.92 lakhs, investing the premium difference of ₹17,647 annually in mutual funds results in a corpus of ₹96.55 lakhs—a whopping 4.8x higher return.

This visual compares LIC’s New Endowment Plan with a Term Insurance + Mutual Fund (Axis MAX Smart Term Plan Plus) approach over 35 years. While the endowment plan gives ₹19.64 lakhs, investing the annual premium difference of ₹14,411 in mutual funds grows the corpus to ₹78.88 lakhs—a 4x higher return.

This visual highlights the returns of LIC’s Jeevan Lakshya endowment plan versus combining Term Insurance with Mutual Fund investment (Tata AIA Life) over 25 years. While the endowment plan pays out ₹15.2 lakhs, investing the ₹28,489 premium difference annually in mutual funds yields a massive ₹43.82 lakhs corpus—almost 3x more.

In a 20-year horizon, HDFC Life Sanchay Plus gives a maturity payout of ₹22.06 lakhs.

But if you instead opt for Bajaj Allianz Term Plan and invest the premium difference of ₹74,512 annually, the corpus after 20 years balloons to ₹47.67 lakhs — more than double the endowment return. This again makes a strong case for Term + Mutual Fund over traditional savings plans.

This visual compares Bajaj Allianz Save Assure and SBI Life Eshield Next with mutual fund investment over 17 years. While the endowment plan gives a maturity of ₹5.75 lakhs, the mutual fund corpus grows to ₹10.3 lakhs. This is achieved by investing the ₹21,263 annual premium difference.

Conclusion: Make Your Money Work Smarter

Endowment plans might offer safety with guaranteed returns, but they often fall short regarding real wealth creation and adequate insurance coverage. Our analysis shows that a Term Insurance + Mutual Fund strategy provides superior life cover and helps you build a substantially larger corpus, sometimes up to 4.8x more than traditional endowment plans.

In an era where financial goals are evolving and inflation eats into fixed returns, it’s time to rethink outdated savings strategies. By separating insurance from investment, you gain more control, better returns, and enhanced flexibility—all while staying financially protected.

So, if you want your money to work harder and smarter, the choice is clear: Go Term + Invest the Rest.