What is Term Insurance vs Endowment Plan?
Term Insurance is pure life protection. You pay a small premium, and if you die during the policy term, your family receives the sum assured. If you survive, you get nothing back—but your family was protected all along. It's like car insurance for your life.
Endowment Plan combines insurance with savings. You pay higher premiums, and at maturity (if you survive), you receive the sum assured plus bonuses. If you die during the term, nominees get the death benefit. Sounds great, but the returns are typically only 4-6% CAGR.
Real Example: Amit (30 years) wants ₹1 Crore life cover for 25 years.
- Endowment: Premium ~₹4.5 Lakhs/year. Total paid: ₹1.12 Cr. Maturity at 5%: ~₹1.7 Cr.
- Term + SIP: Term premium ~₹12,000/year. Invests ₹4.38L/year in mutual funds at 10%. Corpus after 25 years: ~₹4.9 Cr!
Same life cover, but ₹3.2 Crore more wealth with Term + Invest strategy!
How Does This Calculator Work?
The calculator implements the famous "Buy Term, Invest the Difference" (BTID) strategy:
- Takes endowment premium you'd pay for desired coverage
- Calculates term insurance premium for same coverage
- Computes the difference (savings)
- Projects endowment maturity at typical 4-6% return
- Projects investment corpus if difference is invested in mutual funds/PPF
- Shows how much extra wealth BTID creates
Formulas Used
Endowment Maturity = Annual Premium × [((1 + r)^n - 1) / r] × (1 + r)
Where r = annual return rate (4-6% for endowment), n = policy term in years.
Investment Corpus = (Endowment Premium - Term Premium) × [((1 + r)^n - 1) / r] × (1 + r)
Where r = expected investment return (7-12% depending on asset allocation).
Term Insurance vs Endowment: Key Differences
| Feature | Term Insurance | Endowment Plan |
|---|---|---|
| Purpose | Pure Protection | Protection + Savings |
| Premium (₹1 Cr cover) | ₹8,000-15,000/year | ₹4-5 Lakhs/year |
| Maturity Benefit | None (or TROP) | Sum Assured + Bonus |
| Returns | N/A | 4-6% CAGR |
| Death Benefit | Sum Assured | Sum Assured + Bonus |
| Tax Benefit (80C) | Yes | Yes |
| Maturity Tax | N/A | Exempt u/s 10(10D)* |
| Flexibility | High (invest anywhere) | Low (locked in) |
*Tax-free if annual premium < 10% of sum assured
Why Endowment Plans Give Low Returns
Many people wonder why endowment plans deliver only 4-6% when markets give 10-12%. Here's where your premium goes:
- Mortality Charges: 2-4% goes toward actual life cover
- Agent Commission: First-year commission can be 25-40% of premium!
- Fund Management: 1-2% annual charges
- Insurer Profit: 2-3% margin
- Actual Investment: Only 50-60% of premium gets invested
With so many deductions, even if the insurer earns 8-10% on investments, you only see 4-6%.
The "Buy Term, Invest the Difference" Strategy
This strategy is recommended by almost every independent financial advisor:
- Buy adequate term insurance - Get 10-15x annual income coverage
- Calculate premium savings - Term costs 90% less than endowment
- Invest the difference - PPF, ELSS, index funds, or balanced funds
- Stay disciplined - Invest the difference every year without fail
Pro Tip: Set up an automatic SIP for the difference amount on the same day you pay term premium. This ensures discipline and removes the temptation to spend the savings.
When Endowment Plans Make Sense
Despite lower returns, endowment plans suit certain situations:
- Forced Savings: If you lack discipline to invest regularly
- Guaranteed Returns: For extremely risk-averse individuals
- Goal-based Savings: Child education/marriage with guaranteed payout
- Loan Facility: Can take loan against policy after 3 years
However, PPF offers similar guaranteed returns (7.1%) with better flexibility and government backing.
Frequently Asked Questions (FAQs)
What is the return on LIC endowment plans?
LIC endowment plans like Jeevan Anand typically deliver 4-6% CAGR returns including bonuses. This is lower than PPF (7.1%), FD (6-7%), and significantly lower than equity mutual funds (10-12%). The low return is because a significant portion of premium goes toward mortality charges, agent commissions, and fund management fees.
What is 'Buy Term, Invest the Difference' strategy?
Instead of buying an expensive endowment plan, you buy a low-cost term insurance for the same coverage and invest the premium difference in mutual funds or PPF. Since term insurance costs 80-90% less than endowment, the invested difference grows significantly more than endowment maturity value over 20-30 years.
How much does term insurance cost for ₹1 Crore cover?
For a 30-year-old non-smoker, ₹1 Crore term insurance costs approximately ₹8,000-12,000 per year for a 30-year term. Online term plans are 20-30% cheaper than offline. Compare this to endowment plans where ₹1 Crore sum assured would cost ₹4-5 Lakhs per year in premiums.
Is endowment plan maturity amount tax-free?
Yes, endowment plan maturity is tax-free under Section 10(10D) if annual premium is less than 10% of sum assured (for policies issued after April 2012). Premiums qualify for 80C deduction up to ₹1.5 Lakh. However, the low 4-6% return makes it inferior to tax-free PPF (7.1%) or ELSS with LTCG exemption up to ₹1.25L.
Should I surrender my existing endowment policy?
It depends on how many years are remaining. If paid 3+ years, calculate surrender value vs continuing. For policies with 5+ years remaining, surrendering and reinvesting in term + mutual funds often makes sense despite surrender penalty. For policies near maturity (2-3 years left), it's better to continue. Always calculate opportunity cost before deciding.