When you have a regular source of income, the time comes to plan your long-term finances. Long-term financial decisions need to be chosen with care, as they directly impact you and your dependents in the long haul. One such decision that you have to make is choosing the right type of insurance to secure the life of your dependents in your absence. With so many financial instruments to choose from, it’s difficult to choose the single best life insurance. These days, most people prefer a term policy or an endowment plan for securing their lives. To choose the best for yourself amongst them, first, it is important to understand both the types and know their differences.
Meaning of term insurance
Term insurance is a simple type of life insurance with no savings or investment component attached to it. It provides you with a life cover for a fixed period, which is selected by you as a policyholder. Since a term plan provides coverage for a fixed tenure, they relatively have low premiums and offer huge sums of insurance coverage. When you buy a term plan, you get coverage for a specified period. If in case you lose your life within that period, your nominee will receive the sum assured. This is provided your demise was within the term plan. There is no maturity or death benefit offered once your term plan expires. One of the biggest term insurance benefits is its affordability. Life insurance being a part of one’s financial goal, people find it difficult to pay hefty premiums for life coverage. Term plan works perfectly as the premiums are affordable and the sum coverage is also surplus when compared to other types of life insurance.
Meaning of endowment plan
Endowment life insurance is a life insurance product that offers the dual benefits of insurance and investment. When you buy it, your money is used to cater for your life coverage and your investment. When your plan matures, you receive a lump-sum amount. In case of your demise within the tenure of the policy, your nominee will receive the assured sum coverage. This instrument helps one in inculcating the habit of savings along with providing life cover. There are several types of endowment plans catering to different financial needs. Along with the maturity benefits, you can also access partial funds of your endowment plan in case of a financial emergency. Calculate the life coverage and investment needs and choose an endowment plan accordingly. Since there are two financial components involved, the premiums of an endowment plan are high.
Difference between term insurance and endowment plan
Both, term insurance and endowment plans can help you achieve your financial goals. While the basic purpose might sound similar, they are two different financial instruments that have unique features and benefits.
- Type of instrument
Term insurance is a simple life insurance product with no other component attached. An endowment plan is a life insurance product with an investment component attached. - Purpose
The sole purpose of a term plan is to provide financial security to the loved ones of the policyholder in their absence. While an endowment plan is for people who are looking to get some returns on investment along with a life cover. - USP
Term insurance is known for its affordability and huge sum coverages. Endowment plans have higher premiums than term plans, as they offer investment and insurance. - Maturity and partial withdrawals
Term insurance, being a pure form of life insurance, neither offers any maturity benefits nor lets you avail of any partial withdrawals. Endowment life insurance also acts as a saving instrument. After your plan ends, you get the maturity benefits, and you can also avail of partial withdrawals in case of a financial emergency.
Once you know the meaning and differences between a term plan and an endowment plan, the time comes to choose. There is no obvious choice here, as both serve different purposes. Take your long-term goals, affordability, present, and future expenses, and financial objectives into consideration before making a choice. Also, you can club term policy or endowment plans with other financial instruments if that will help you further in meeting your financial goals.
