Buy Life or Term Insurance

"If a child, a spouse, a life partner, or a parent depends on you and your income, you need life insurance."

Suze Orman

Now that we have realized the importance of having insurance and what are various kinds of insurance available, the most important topic in this discussion is whether to opt for an endowment plan or term insurance.

The aim of this article is to educate investors as to the difference between both. Since both offer life insurance covers, it can be easily misunderstood, and often times people opt for the wrong product.

Here, it is important to note that this article is not about which one is better. It is to educate the readers to make an informed choice since each individual has a different financial glove and there is no one size fits all approach to this. Hence understand the differences and benefits of both before investing in them.

For sake of convenience, policies from the Life Insurance Corporation of India have been chosen for comparison. Readers are free to do due research with other companies to verify the details.

It is also important to note, that in order to make this comparison easier, many overheads like rebates and taxes have been excluded from the calculation for sake of calculation convenience. Hence, final values may vary in actuality.

For comparison between the endowment plan and the term plan, the following insurance policies have been selected:- Term Insurance: LIC's Saral Jeevan Bima (Plan No. 859) Endowment plan: LIC's Jeevan Azad (Plan No. 868)

Readers are encouraged to visit the LIC website and check their offer documents to do their own research. Here is a comparison of two policies:

As you can from the table above, if you had invested in an endowment plan, you pay Rs. 5,90,000 for an insurance cover of Rs. 10,00,000. For the same coverage under the term plan, you only pay Rs. 83,800. Now some may beg to differ stating they are getting good returns on the investment along with insurance coverage. It might come as a disappointment, but the annualized return on investment in the case of the endowment is a paltry 2.66%.

Yes, you may also point out that Rs. 83,800 paid under term insurance offers no maturity value. At the end of the term (i.e. 20 years) you get zero returns. But it is to be understood that insurance is not an investment product. Its job is, like the name says, to insure! If you don't buy health insurance or motor insurance for investment, then why compromise on arguably the most important asset of all-you?

Now, have a look at this table:

This would have totally changed your outlook.

Even if you increase your term insurance coverage to Rs. 20,00,000 and invest the balance amount in SIP (while SIPs generate returns ranging from 8%-16%, 8% has been chosen on a conservative side) for 20 years, not only you got twice the insurance coverage but you get whopping 247% returns!

Sure endowment plans offer a risk-free investment, it is to be noted that you get risk-free investments in SIPs too, but more importantly, you get a larger cover.

Additionally, Rs. 10,00,000 may seem like a lot of money right now, but after 20 years, it would have lost the purchasing power due to inflation and will be worth a lot less and will not be sufficient to support your loved ones. As a thumb rule, you should ideally insure yourself to 10-12X your annual income. For example, if your annual income is Rs. 20,00,000, then ideally minimum sum insured should be Rs 2,00,00,000.

Now, that we have discussed having an insurance policy, let us also discuss how many policies to have, it makes sense to have the least number of policies because they are easier to manage. Instead of having 5 policies of Rs 2,00,000 each, have a single policy of Rs. 10,00,000. This will also ease the pain of your loved ones in case they have to run around to claim money!

There are a plethora of insurance products available these days, therefore, readers are encouraged to go through each insurer and look for the product which best suits them. Remember, at the end of the day, the only thing worse than having a bad insurance policy is having no policy!