Majority of the people in India take Endowment plans mainly due to the lack of their knowledge or they are trapped by the agents with promise of “guaranteed return”.
Endowment plan is one of the most mis sold product. It is generally sold in multiple “emotional” forms such as children education, retirement, tax saving investment, money back plan, dual benefit plan etc. You will seldom come across an agent selling you a term plan.
| Term Insurance | Endowment | |
1.Protection offered till what period? | Limited period as per your policy term | Limited period as per your policy |
2.Do you receive money after maturity? | No | Yes |
3.Is it an investment ? | No, Only life cover | Yes |
4.Premium Amount | Less expensive | More Expensive |
5.Premium paid for an Insurance cover of Rs.1 Crore by a 30 Year old for 30 years period | Insurance is cheap. A non-smoker man needs to pay about Rs.9500 annually | Insurance component is very expensive. He needs to invest of around Rs.1 lakh annually |
6.Insurance for about Rs.20,000 premium paid annually by a 30 Year old, 30 years period | You can get sum assured of about Rs 2 crore+ | You can ONLY get a sum assured of around Rs.16 lakh |
7.Is it linked to market returns? | No | Yes, ULIP’s |
8.Any bonus offered? | No | Yes. Varies across companies |
9.Surrender Value | No | Yes. Depends after how many years after the policy is surrendered. |
10.Section 80C tax benefit on the premium paid | Yes | Yes |
11.Is the return taxable? | Not applicable | Yes, 1/3 of lumpsum received is not taxable |
12.Are the returns good? | NA, no returns are offered | Effective returns are low, typically 5% to 6.5% |
Both term plans and endowment plans offer multiple rider options. Though you will have to pay extra premiums to buy these extras, the benefits offered by them are good. There are some riders that are available only with term plans, while some are available only with endowment plans. Some of the extras include critical illness rider, accidental death benefit rider, hospital cash rider, premium waiver rider etc. Life insurance plans are good tax-saving instruments. All the premiums you pay under a term plan are exempt from income tax deductions as per section 80C. The sum assured you receive are non-taxable under section 10(10D) of the income tax Act, 1961. Therefore, income tax exemptions are higher in endowment plans as compared to term plans.
Recommendation:
If your family is financially dependent on you, it becomes mandatory for you to have a term insurance plan. This is because in an event of death of the breadwinner of the family, the nominee will receive large sum assured depending on the chosen plan. Whereas in case of endowment/money back plan your dependents will receive only about 10 times the annual premium paid by you.
If your aim is wealth creation, then avoid endowment plans at all costs and stick to investments in Mutual Funds & Equity with option to enter & exit at your will. If you are a conservative investor you can explore options such as PPF, VPF & Sukanya Samriddhi Yojana (if you have girl child) etc in addition to a term insurance.
Disclaimer: The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of any agency. Consult your trusted financial adviser for further details.