The BuyT Desk
Insurance gives you protection against unforeseen situations. Are you wondering what kind of plan you should buy? Whether to buy a term plan or an endowment plan? These are two broad categories of insurance plans, and the type of plan decides your benefit and maturity payouts. Both plans protect policyholders’ family in case of death, but their structures differ. They will give you a tax exemption as per the Income Tax Act, but you must understand how term and endowment plans differ.
Term Plan
A term plan is a no-frill comprehensive cover. It does not provide any monetary benefits at the time of maturity. Term plans are priced at very low premium rates. In a term plan, the beneficiaries receive the maturity amount on the policyholder’s untimely demise. The low premium of term insurance makes it very affordable. Every earning individual supporting a family and has payment liabilities like loans and payment for children’s education must have a basic term plan to cover his/her life. In case of an unprecedented death incident, at least their family will have a financial cushion to fall back on.
Endowment Plan
An endowment plan is a combination of insurance and investment. When the endowment plan matures, the premium paid by you over the years will be your corpus. But the premium for endowment plans is on the higher side.
The Premium Difference between Term & Endowment Plan
The most significant advantage of a term plan is its affordability. It gives life coverage at very low premium rates. As far as endowment plan is concerned, the premium is on the higher side. For a cover of Rs 1 crore, the term plan premium would be somewhere between Rs 8500-9000 whereas premium for the same coverage for an endowment plan would be around Rs 90,000 annually.. But the critical difference is that in a term plan when a policyholder outlives the policy, he never receives any amount when the policy completes the tenure. But in an endowment plan policyholder receives a sum assured.
Both the plans, term and endowment offer various rider or additional benefits. If you opt for a rider, your premium outgo will rise. Some of the riders include critical illness, accident cover, hospital cash cover and so on.
Taxability
Life insurance premium payment has always given tax benefit. You can claim a tax deduction of up to Rs 1.5 lakh under section 80C of the Income Tax Act. And in case you buy an endowment plan and will be receiving a sum assured then as per section 10(10D) of the Income Tax Act this amount will be non-taxable.
How should you choose?
If you have a family that is financially dependent on you, it’s very important to have a term plan. After taking a term plan if you have a surplus fund that you want to save for the future, go for an endowment plan. But just buying an endowment plan without having a proper term plan will not be wise.
