BT Insight: All you need to know about Term vs. Endowment Insurance plans

Buying life insurance does not appeal to many. Apart from tax benefits under Section 80-C of the Income Tax Act, people don't see value in life insurance plans. Most of those who do see a worth, end up buying investment-linked insurance (also called endowment policy) instead of pure term insurance policy. On the face of it although endowment policy appears attractive, but keeping your insurance and investment motives separate is a thumb rule that most financial planners advise. Instead of paying high premium each month in an endowment policy, the same amount cannot be divided into monthly term plan premiums and systemic investment in financial products such as mutual funds to get the most benefit, they say.

Here is all that you must know about endowment and term insurance policies:

What is term insurance policy?

Term insurance is a pure insurance cover that only offers death benefit. If nothing happens by the maturity of the policy, premiums that you have paid lapse. However, death benefit is mostly 20 times the annual income of the policyholder and premiums are cheaper.

What is endowment insurance policy?

Jenny Shah, AVP-Investment Advisory, Capital Quotient says that any life insurance plan with a savings component in terms of lumpsum maturity along with death benefit is termed as an endowment plan. However, neither maturity nor death benefit is appealing. Sum assured as maturity benefit is hardly enough to cover inflation, while death cover is also insufficient. Besides, premiums are higher for endowment policies compared to term insurance.

However, the sum assured at maturity is non-taxable under Section 10 (10D). That said, over a long-term, the returns could be comparable to shorter horizon products without tax benefits, points out Harish Kurudi, Head - Product Development and Management at Aegon Life Insurance.

Why term plan over endowment?

Pinky Agarwal, Assistant Professor, ITM Business School says that the goal of investment should not be clubbed with the need for insurance. "Insurance plans should be chosen as per the financial need of the individual. Since the basic purpose of insurance is different from other financial goals, term insurance policies are preferred more in comparison to endowment policies," he says.

However, risk averse people with regular income may consider endowment policies, as it provides disciplined route of savings and can come handy for some financial emergency.

Who should buy endowment?

There are different kinds of endowment polices. "The return on market-linked endowment plans depends on how financial market performs. Sometimes, the return could be even lower than the premium amount. Non-market linked policies provide guaranteed benefits albeit lower so that there are no surprises on the maturity date. Few other endowment plans offer bonuses," Kurudi of Aegon Life says.

Hence, only those with regular income looking for guaranteed returns (even if lower) should go for policies with guaranteed matured benefit.  "Such policies are ideal for small businessmen, salaried individuals and professionals, such as doctors and lawyers to meet their long-term financial security needs," says Shah of Capital Quotient.

 "There is a plethora of endowment policies available in the market. It is important to check premium rates along with company track record for paying bonus and financial stability of the company. One must check claim settlement ratio and customer service as well," he adds.

Who should buy term plan?

Kurudi of Aegon has a straightforward answer: "Everybody need term plan if you have financial dependents, period!"

However, there could be issues in term plans as well. Shah of Capital Quotient suggests following things to keep in mind:

• Buy Term Insurance as soon as possible, as it becomes tougher and expensive with age.
• Don't buy Term Insurance with Single premium
• Don't hide your Family health history or your health condition
• Don't forget to add nominee name
• Disclose old insurance policy, if any.
• Choose strong insurance partner, communicate to your family about the same and check insurance papers in detail to verify details.

Stuck with endowment policy?

Depending on the period of holding and terms of policy, a policyholder has three options if she is stuck with an endowment plan: surrender, continue or convert it into a paid-up plan. "Surrender, if there is a long time to maturity, the premium paid is not high and surrender charges are acceptable. If the maturity is a couple of years away, continue. However, if the term is between these two, change it to a paid-up policy, that is, acquiring a paid-up value on maturity," says Shah. Paid-up value is the reduced amount of sum assured against premiums paid so far.

If you do continue with the endowment policy, you must know some fringe benefits. One can avail loans against one's endowment policy either from insurance companies or banks in case of financial emergency. "These plans can also be used as collateral securities and can be assigned to banks, says Kurudi of Aegon, adding term plans can only be used as collateral security and not for availing loans.

However, Kurudi cautions that when insurance policy is used either to take loan or as collateral security, the cash and death benefits go to banks or insurance companies to the extent of security or loan as applicable, and only the balance amount goes to the beneficiary. Hence, it is inadvisable to borrow loan against insurance policy. Do it only as a last resort.

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