In the ever-changing world of financial security, life insurance and endowment plans are two cornerstones that help people secure financial stability for themselves and their families. Life insurance offers a safety net in the case of the policyholder's untimely death, ensuring that their loved ones are financially secure. Endowment policies, on the other hand, include a savings plan in addition to life insurance. This implies they have a dual purpose: they provide financial security while assisting policyholders in future savings.

These financial products are critical in a nation like India, where family is typically vital to one's life and economic uncertainty may cause major financial turmoil. Now, let's look more closely at the differences between life insurance and endowment plans to better appreciate their respective roles in financial planning.

Distinctions between life insurance and endowment policies

Purpose

Life insurance is a kind of insurance that is primarily intended to provide financial security to the policyholder’s dependents in the event of the policyholder’s death. It is a precautionary measure that if the breadwinner is no longer alive, then the economic needs of the family are met, thereby minimising the effect of the loss of a breadwinner.

In addition to offering life cover similar to life insurance, endowment policies are designed to also provide a maturity benefit if the policyholder survives until the end of the policy period. This is why it is such a popular choice for those seeking to get both protection and savings, as it helps in building wealth in the long run.

Coverage duration

The duration of life insurance can also be short or long, with term life insurance covering for a specified number of years (usually between 10 and 30 years) while whole life insurance covers the policyholder for his or her entire life or until death, whichever comes first.

Endowment policies are usually taken for a specified period, which may take between 10 and 30 years, and provide a lump sum benefit upon the policyholder’s death if the policy has not matured. This term is closely associated with major life objectives such as retirement or children’s education.

Maturity benefits

Standard-term life policies pay no maturity benefits—most of the emphasis is on the death benefit. Still, whole-life policies may have some cash value or dividends that can be earned and accessed based on specific conditions.

A key advantage of endowment policy is the maturity benefit, which comprises the assured amount as well as extra bonuses or profits based on the policy’s performance. This can pay a good amount at the end of the policy period.

Premium costs

Life insurance has lower premiums as it is mainly a risk cover with no investment aspect. This makes it cheaper than other life insurance products in the market.

Premiums in endowment policies are higher as they not only pay for insurance coverage but also save for the future. This part of the premium is invested by the insurer and the returns are given at the time of maturity as maturity benefit.

Returns on investment

As a rule, there are no earnings from pure-term life insurance policies; the benefit is purely in the form of a death benefit.

These endowment policies provide returns on investment in the form of cash value and bonuses which are payable together with the sum assured at maturity or in the event of death.

Risk factor

Life insurance has less risk because it is pure insurance and does not involve investment risk.

An endowment policy is somewhat risky as the amount to be paid out depends on the performance of the investment made by the insurer. However, many policies provide guaranteed minimum rates of return.

Flexibility in terms

There is also a lot of flexibility when it comes to the amount of coverage and the tenure of the life policy, which can be chosen as per the requirement and the changes in the life events.

Typically, endowment policies are less flexible because the term and the amount to be paid are predetermined to fulfil certain financial objectives.

Tax benefits

Premiums paid towards both life insurance and endowment policies are eligible for tax deductions under section 80C of the Income Tax Act. The maturity amounts from life insurance policies are tax-free under Section 10(10D) if specific conditions are fulfilled, while endowment policies can have different tax consequences depending on the plan and terms.

Loan facility

There are cases where the policyholder can borrow money against the policy, and this is a good feature when one needs cash.

An endowment policy allows the policyholder to borrow money against the cash value accumulated in the policy during the policy period.

Suitability

Life insurance is favourable for those who have the main aim of providing for their family financially in case they die, without having to save money through an insurance policy.

An endowment policy is ideal for those who are interested in a product that provides life insurance as well as the chance to save periodically to accumulate a fund over time.

Payout options

Life insurance is primarily concerned with the payment of a death benefit.

Endowment policy comes with both a death benefit and a survival benefit, which adds a dimension of financial planning that extends beyond risk cover.

Investment component

There is no element of investment in life insurance; it is a mere insurance policy.

Endowment policy includes an investment or savings component where a part of the premium goes towards building a cash value.

Financial planning

Life insurance mainly aims at giving financial cover in the event of death.

Endowment policy is useful in policy planning because it provides both protection and savings, the two aspects that can assist the policyholders in achieving their long-term financial objectives.

Policy term

Life insurance choices range from a few years to a lifetime, allowing you to pick based on your specific protection needs.

Endowment policies often have a predetermined policy term that is established at the outset, which corresponds to attaining certain financial goals such as supporting a child's school or retirement planning.

Conclusion

Life insurance and endowment plans play important but unique roles in financial planning. Life insurance is essential for anyone looking to secure their family's financial future in their absence, whereas endowment policies are ideal for those who want to not only protect their loved ones but also accumulate funds for future needs, such as retirement, children's education, or other significant milestones. As a result, the decision between the two is heavily influenced by one's financial objectives, risk tolerance, and need for savings. Many people find that including both types of insurance in their portfolio helps with complete financial planning.