21/11/2014 2 Comments (http://apnafinguide.weebly.com/articles/term-insurance-plan-vs-endowment-plan#comments)

TermInsurancePlanvs.EndowmentPlan(http://apnafinguide.weebly.com/articles/terminsuranceplanvsendowmentplan)

Today, a comparative study between endowment plan and term Policy will be discussed. Hope afterreading this article the reader will be able to decide which is better.

Endowment Plan(like Jeevan Anand, Jeevan Saral etc.) is Insurance + Investment, where thenominee of the policy holder will get the Sum Assured(SA) + Bonus + Loyalty Addition as a death benefitof the policy holder within the term period, otherwise the policy holder will get the maturity amount incase of survival during the term.

Term policy is based on only Insurance, where the nominee of the policy holder will get the SA as adeath benefit of the policy holder within the term period, otherwise the policy holder will not get anymaturity amount in case of survival during the term.

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Here is a illustration how both are different:

#View 1:

Endowment plan(Jeevan Anand):

For a person

Age= 25Y, Term=30Y, SA=10,00,000/-(How to select Sum Assured amount is demonstrated in " What should be the sum assured amount forLife Insurance? (http://apnafinguide.weebly.com/articles/what-should-be-the-sum-assured-amount-fo-life-insurance) ")

Premium to be paid Rs.33,064/- per year

Taking the optimum case, i.e. somebody dies at the last year(30th year, just before the end of thepolicy), in that case total amount nominee will get Rs. 24,00,000/-(24L)(max)(SA+Bonus+Loyalty). Howeverin case of maturity benefit he may also avail the same amount.

In case of accidental death the nominee will get extra Rs.1000000/- means in total Rs.34,00,000/-(34L).

Now considering the term policy

For a person

Age= 25Y, Term=30Y, SA=25,00,000/-(not considering the accidental benefit)

(https://www.facebook.com/pages/ApnafinGuide/574698746007413)Premium to be paid Rs.3575/-(LIC e-term plan) per year

So one can save (33064-3575)=29489/- per year. Now if one is doing a RecurringDeposit(29489/12)=Rs.2457/- per month @ 8% interest then the total maturity amount you will get Rs.36,46,937/-(36L).

So, the policy holder dies on the 30th year in case of LIC endowment plan nominee will get only 24Las death benefit, but in case of term policy nominee will get both the death benefit plus the maturityamount from RD which is around 60L.

This I have taken as RD(monthly installment), but if somebody is paying the premium annually, in thatcase the interest accumulation will be more. Also, this is not enough, if you consider equity market which isalways safe for long term, can give you a return that you havnt thought off. Considering moderate riskymutual fund HDFC Balanced Fund(G) for a tenure of 10 years(2003-2013), it has given an absolute returnof 447.1% i.e annually 44.71% (Rs.100000/- has grown to Rs. 547100/- in 10 years).

#View 2:

However in Endowment scheme whatever calculation has been shown that is the max death benefitnominee will get if he/she dies on 30th year, just before the end of the policy term. Now if he/she dies at10th or 15th year(means at the age of 35-40Y) then in that case nominee will get the SA but as thepolicyholder paid less premium in that case the varaible(bonus+Loyalty Addition) amount will be less. Butin case of Term policy the amount is fixed, irrespective of premium payment period.

#View 3:

Assume, today somebodys monthly expense is Rs.25000/-. So at an average of 7% inflation rate peryear after 30 years his/her monthly expenditure will be 25000 x (1.07)^30= Rs.1,90,306. Now imagine, ifnominee is getting Rs. 25,00,000 after 30 years, will it be a fruitful amount?

But if anyone is going for a sum assured of 1Crore, it may make some sense. In that case the premiumyou are paying Rs.10,400/-(without service tax) per annum for the LIC eterm plan.

#Comaparative Study:

So for a,

Term Policy(LIC e-Term): SA=1Crore, Term=30Y and Age=25Y

equivalent to

Endowment Policy (LIC Jeevan Anand): SA=50L, Term=30Y and Age=25Y(assumingloyalty+Bonus=50L(additional to SA))

Here in case of endowment scheme if the policy holder dies nominee will get 1Crore as death benefit,else the policy holder will get 1Crore at the maturity, in case of survival(assuming the optimum case).

So in case of term plan if the policy holder dies nominee will get 1Crore as death benefit plus savingamount as 1.9Crore(Tax is not considered in this calculation) i.e. total 2.9Crore, else the policy holderwill get 1.9Crore as the savings return, in case of survival.

However there are several other insurers also. Please go through the Key Parameters to selecta Life Insurance Plan (http://apnafinguide.weebly.com/articles/november-21st-2014).

Hope this article will help the reader to understand the difference between endowment policy and termpolicy.

Please share your views.