Term Insurance Vs Endowment

Even before we start comparing term Insurance with Endowment, Let me first explain to you how insurance is perceived in our country and in the process, I intend to bust one of the greatest myths of personal finance that is “Insurance is an Investment.” People often confuse insurance as an investment, and an increasing number of people are “investing” in insurance, of course, they are undeniably being driven by the ambush marketing of insurance companies that spends huge money on branding. These companies prefer to label their products as investments.

The situation today is starkly different from yesteryears when insurance was truly a matter of solicitation by agents. Insurance advertising in media, which was scant even a decade back, has increased by leaps and bounds. Well, there is nothing wrong with that because it’s a product after all, which needs to be sold. What is wrong is that the bulk of the money flowing into an insurance company’s coffers is essentially towards investment and not as payment for insurance.

The aim of insurance

Let’s first check out the purpose of insurance and what it serves. All insurance plans aim to protect you from financial risks. While life insurance helps you to secure the future of your loved ones financially after your death, car insurance ensures that accidents don’t leave you bankrupt. Health insurance, on its part, ensures that medical bills don’t dig a hole in your pocket. What this means is insurance is a premium that you pay to cover any unforeseen risks.

How much insurance do I need?

Buying insurance is important. But a far more important question is how much insurance is adequate? What’s the approximate amount that will ensure that your family’s future is secure?

In India, when it comes to buying a life insurance policy, we mostly hear of calculating insurance requirement by using the human life value (HLV) system. But HLV considers the income of the person and takes multiple assumptions that aren’t tenable over the long run.

Below are some points to consider t arrive at a more realistic result.

What is term insurance?

Term insurance plans are a type of life cover(In fact, term insurance is the purest form of insurance). They give coverage for a fixed period of time. If the insured dies during the policy term, then the death benefits are paid to the nominee. The plans are particularly designed for securing the needs of your family.

The premium for term insurance policies is the lowest among all the insurance products because there’s no investment component and the full premium is used to cover the risk. There’s no maturity or survival benefit once the policy term ends. There could be some plans, offering a return of premiums paid, of the insured person, survives.

What is an endowment plan?

An endowment plan is a combination of a savings plan and a protection plan. These policies cover risks for a particular period. The premium of endowment policies is much higher compared to that of term insurance plans. In case of the insured’s death before completion of the policy term, the assured sum and accumulated bonuses are paid to the nominee. Survival benefits in endowment policies are paid to the insured if he/she survives the term, along with the accumulated bonuses as declared by the insurance company.

Endowment policies are meant for those looking for regular savings with a 100% guarantee on their investment, those who require a lesser sum assured, and a lump sum amount at a particular age; the following points must be considered before taking a policy.

Bonuses are not assured. They are usually paid when the insurance company rakes in profits.

If you want to surrender the policy within three years of subscribing it, you might receive a meagre/nil surrender value.

If you retain the policy for the entire term, the yield usually varies 3% to 6% depending upon your policy. 

Source: https://www.mymoneysage.in/blog/term-insurance-vs-endowment/