How to choose life insurance policy – Endowment plan or Term life policy

In an earlier post, we have discussed about Term life insurance policy and ULIP policy. Now we are going to discuss about Endowment plan and Term life insurance policy and their benefit in our life.

We knew Term life insurance policy in an earlier post, but here I again write about Term life insurance policy in brief.

 



The Term life insurance policy

The Term life policy is one of the oldest form of life insurance policy, service provided by the insurance companies, this is also a simple form of the life insurance policy.

In this type of policy, simply a person gives a sum amount of premium to the insurance companies and the insurance companies cover the life of the person, the insurance companies assure him and provides for payment of the sum assured on death,

Term insurance covers a certain period of time or a specified term of years. In an active policy, if the insured (person) dies during the time period, which is given in the policy, then a death benefit (as the sum assured ) will be paid.
Term life insurance policy is not an investment plan. It is an expense for covering life risk and get nothing to the person after completing the policy term year (on his survival ).

You can get tax benefit on the premiums paid on buying term insurance policies,  term insurance policies are much less expensive, compared to other different types of insurance policies available in the market, a person gives a small premium to cover life risk (high sum assured).

 

insurance coverage
Insurance life cover

(Photo by  Ulises Baga  on unsplash)

 

Now we look at the Endowment insurance plan 

What is an Endowment Life Insurance Plan?

Endowment life insurance policy is a combination of both life insurance policy and a savings plan. it is slightly different from term life policy. The Endowment life insurance policy helps in saving regularly for a specific period of time, with life insurance covered (sum assured).  The policyholder will get a lump sum amount on policy maturity if he survives the policy term (completing the term year).

In the case of unfortunate death of the policyholder between the policy term, the insurance company will pay the sum assured (plus the bonus, if any) to the nominee.

The Endowment life insurance policy is useful to meet the various financial needs such as buying a house, marriage and or children’s education.

If anyone buys an Endowment life insurance policy for 20 years, the buyer is entitled to investment benefit at the end of 20 years. This is the basic structure of an Endowment life insurance policy. The premiums pay buy the buyer goes for both insurance coverage and investment.

Policy buyer can easily choose how much premiums to pay each month/quarter/year and what is the premiums paying term year, usually, this is for 10 to 20 years.

There are many types of Endowment life insurance plan

1.Unit-linked (ULIP) Endowment Insurance Plan :

ULIP (Unit linked insurance plan) is a life insurance cum investment plan, that provides us insurance payout benefits with the capital appreciation on the investment.

ULIP is opened by a person for both life insurance coverage cum investment plan, the amount is paid by the plan buyer as a premium for a specified time for both life insurance coverage cum investment plan.

Investment options of ULIP (unit link insurance plan) are likely structured similar to a mutual fund.

ULIP (unit link insurance plan) assets are managed by a specified body (asset management company or in short form called AMC). The body daily calculates net asset value of the relative unit and this called NAV (net asset value), this NAV is the per unit value.

Unit-linked (ULIP) Endowment Insurance plan is an insurance cum investment plan, where some part of the premium goes for invested in units of a specified insurance fund, and some part of the premium goes for insurance coverage.

Policyholder has the option to choose the investment funds where the premiums are invested in, and what is the proportion of premium. Unit prices are published on a regular basis (NAV) by AMC.

2. Low cost Endowment Insurance Plan (LCE) :

A low cost endowment plan is where an estimated future growth rate will meet a target amount and decreasing life insurance to ensure that the target amount will be paid out as a minimum if death occurs (critical illness). In this endowment plan the policyholder allowing to accumulate the funds which have to be paid, but nowadays it is not so popular.

3. Full Endowment Insurance Plan :

When where the basic sum assured (life insurance coverage) is equal to the death benefit at the start of the policy and, assuming that there is growth, but the final payout may be much higher than the sum assured. This a full endowment policy.

Other Endowment Insurance Plans are – Traded endowments, Modified endowments plan.

The Main Features of A Endowment plolicy-

High returns:

The payout for both survival benefit and death benefit of an endowment plan is higher than a pure life insurance policy.

Death and survival benefits:

In case of unfortunate death of the insured person, the beneficiary/nominee of the policy gets the sum assured along with bonuses (if any).

Low risk investment:

An Endowment Insurance Plan is a low-risk investment cum insurance plan, it safer as compared to the other investment plan such as the ULIP and Mutual Fund.

Tax Benefits:

The policyholder can get tax exemption on both premium payments and maturity and final payouts as per Income Tax Act.

Riders plan available under Endowment Plan:

There are many Riders plan (other benefits for a very low premium) likes-Accidental death benefit, Critical Illness benefit, Disability benefit, Waiver of premium benefit, Hospital Cash Benefit and more.

As you see there are many benefits of an endowment insurance plan. Both Term insurance plan and an Endowment Life Insurance Plan are good on its ground, as per a personal requirement.

If anyone wants to a high life insurance coverage (sum assured amount) can buy a Term insurance plan, If anyone wants both life insurance coverage cum investment plan can buy an Endowment Life Insurance Plan

Anyone can buy (if can afford) both Term insurance plan and an Endowment Life Insurance Plan for both high life insurance coverage (sum assured amount) + investment plan for a better life.

Always see and observe full insurance plan details before buying any life insurance plan.

 

May like to read more –

Buying right life insurance policy-Term policy or ULIP.

Easy affordable term life insurance policies in USA

 

 

Note: Posted by Ajay Srivastava a former life insurance adviser (Tata Aig Life Insurance).