LIFE INSURANCE - WHY SHOULD YOU CHOOSE TERM INSURANCE ONLY AND NOT ENDOWMENT POLICY
TERM INSURANCE:
TERM INSURANCE:
In case of unexpected death during the currency of the policy, dependents receive the sum assured. However once the term is over the life cover ceases and no amount is paid back to the insured. However one can customize Term Insurance with the addition of riders, such as child, waiver of premium, or accidental death.Term insurance, as the name suggests, is for a limited period, and has the least possible premium among all insurance plans. Amount of premium to be paid each year is fixed and does not rise during the term period.
To keep it simple a Term Insurance is like a car insurance where the insurance cover expires each year unless renewed before the expiry and the premium paid is a pure expense and not an investment. However in case of car insurance premium each year reduces but in case of Term Insurance the premium is fixed through out the policy term.
ENDOWMENT POLICY:
An endowment policy is a combination of insurance and investment: The policyholder's life is insured for a certain amount. This life cover is referred to as the sum assured.
Some part of the premium gets allocated towards this sum assured. Another part is allocated towards the administrative expenses of the insurer. The remaining portion of the premium gets invested.
Let us understand better by the help of following Example:
If Mr A purchases an endowment policy and pays a premium of Rs 10,000 annually for 15 years, then Mr A is likely to get a cover of perhaps Rs 3 lakhs or so, with the amount returned after 15 years with accumulated bonus etc.
In a term insurance for the same period and same amount Mr A would probably get a cover of minimum Rs.15-Rs to 35 lakhs. This means that in case the policy holder dies during the cover period he is likely to get a huge amount as sum insured as compared to an endowment policy, which would provide very less coverage.
So it's beneficial to go in for a term insurance policy for protection purposes since it covers the death risk several times, as compared to an endowment policy. No doubt, the sum assured would be returned back in the case of an endowment policy, but the returns (though are tax free) are very low and the purpose of insurance is defeated as the risk coverage is also too low.
If Mr A purchases an endowment policy and pays a premium of Rs 10,000 annually for 15 years, then Mr A is likely to get a cover of perhaps Rs 3 lakhs or so, with the amount returned after 15 years with accumulated bonus etc.
In a term insurance for the same period and same amount Mr A would probably get a cover of minimum Rs.15-Rs to 35 lakhs. This means that in case the policy holder dies during the cover period he is likely to get a huge amount as sum insured as compared to an endowment policy, which would provide very less coverage.
So it's beneficial to go in for a term insurance policy for protection purposes since it covers the death risk several times, as compared to an endowment policy. No doubt, the sum assured would be returned back in the case of an endowment policy, but the returns (though are tax free) are very low and the purpose of insurance is defeated as the risk coverage is also too low.
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