Term Insurance vs Endowment Policy

You’ve heard this pitch. Maybe at a family dinner when a distant relative who “works in LIC” cornered you. Maybe from an agent who showed up at your office during lunch break with a glossy brochure. The script is always the same: pay ₹40,000–₹60,000 a year for 20 years, get life cover, and at maturity, get all your money back plus bonus. Best of both worlds.

It sounds logical. It feels safe. And it’s one of the worst financial decisions you can make.

Let’s pull this apart — not with opinions, but with actual numbers.

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“Endowment plans give guaranteed returns, mutual funds are risky.”

The word “guaranteed” does heavy lifting here. Yes, the return is guaranteed — guaranteed to be terrible. Most endowment and money-back policies deliver 4–5.5% annual returns after you account for all bonuses and the maturity payout. A bank FD gives you 7%. Inflation in India averages 5–6%. Your “guaranteed” return is barely keeping pace with rising dal prices, and in many cases, actually falling behind.

The guarantee isn’t that you’ll grow wealth. The guarantee is that the insurance company will hold your money for 20 years and give you back slightly more than you put in.

“Term insurance is a waste — you pay and get nothing.”

Do you buy your bike helmet hoping to crash? You buy it in case you crash. Insurance is the same — it exists to protect your family financially if you’re not around. The “you get nothing” argument only works if you think dying is the preferred outcome just to claim money.

Term insurance is cheap precisely because it only does one job: pay your family a large sum if you die during the policy term. No savings component, no investment gimmick, no maturity payout. One job, done properly. That’s not a drawback — that’s efficiency.

“There’s no point buying insurance if your money doesn’t come back.”

Your money does come back — just not from the insurance company. You invest it yourself and earn far higher returns than any endowment plan ever will. More on this below.

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The ₹60,000/Year Breakdown: Two Paths, Same Money

Imagine two 25-year-old professionals, both non-smokers, both willing to spend ₹60,000/year on financial protection.

Aman buys an endowment policy:

• Annual premium: ₹60,000
• Coverage: ₹10,00,000 (₹10 lakh)
• Term: 20 years
• Total premiums paid: ₹12,00,000
• Maturity payout (including bonuses): ~₹17,50,000
• Effective annual return: ~4.8%

Sneha buys term insurance and invests the rest:

• Term insurance for ₹1,00,00,000 (₹1 crore) coverage: ₹9,500/year
• Remaining ₹50,500/year invested in an equity mutual fund SIP: ~₹4,208/month
• Total premiums paid over 20 years: ₹1,90,000
• SIP corpus after 20 years (at 12% average return): ~₹38,50,000
• Total insurance premiums + invested amount: ₹12,00,000

Aman walks away with ₹10 lakh of coverage and ₹17.5 lakh at maturity. Sneha walks away with ₹1 crore of coverage and ₹38.5 lakh in her investment account.

Same annual outgo. Sneha has 10x the protection and more than double the wealth. This isn’t cherry-picked math — it’s how the products are fundamentally structured.

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What Your Agent Won’t Tell You

Commission structures are the real story. IRDA (Insurance Regulatory and Development Authority of India) data is publicly available. On a traditional endowment plan, agents earn 25–35% of the first-year premium as commission. On subsequent years, they continue earning 5–7.5%. On a term plan, commission is 10–15% of a much smaller premium.

An agent selling Aman’s ₹60,000/year endowment policy earns ₹15,000–₹21,000 in year one. The same agent selling Sneha’s ₹9,500/year term plan earns ₹950–₹1,425. The incentive structure makes it almost irrational for an agent to recommend term insurance. They’re not evil — they’re responding to their own financial reality.

Surrender penalties are brutal. If you buy an endowment plan and realize your mistake in year 3, you can’t just walk out. Surrendering before the lock-in period (usually 3–5 years) means you lose a significant chunk — sometimes 30–40% of premiums paid. Even after the lock-in, surrender values are shockingly low compared to total premiums paid. You’re financially trapped.

The “tax-free maturity” angle is misleading. Agents emphasize that endowment maturity proceeds are tax-free under Section 10(10D). True — but ELSS mutual funds also offer tax benefits under Section 80C with a 3-year lock-in instead of 20. And long-term capital gains on equity up to ₹1,25,000/year are tax-free too. The tax argument doesn’t hold up under scrutiny.

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Executing “Buy Term, Invest the Rest”

This is the single most repeated advice in Indian personal finance forums, and for good reason. Here’s how to actually do it:

Step 1 — Determine coverage. Multiply your annual income by 10–15. Earning ₹6,00,000/year? You need ₹60–90 lakh coverage. Earning ₹12,00,000? Go for ₹1.2–1.5 crore.

Step 2 — Buy online. Online term plans skip agent commissions, making them 30–40% cheaper. Compare plans on Policybazaar or directly on HDFC Life, ICICI Prudential, Max Life, or Tata AIA websites. A healthy 25-year-old male can get ₹1 crore coverage for ₹8,000–₹12,000/year.

Step 3 — Set up a SIP with the difference. If you were going to spend ₹50,000/year on an endowment, and your term plan costs ₹10,000, invest the remaining ₹40,000 (₹3,333/month) into a Nifty 50 index fund or a diversified flexi-cap fund.

Step 4 — Add riders carefully. Critical illness and accidental death benefit riders add ₹1,000–₹3,000 to your annual premium but provide genuinely useful extra coverage.

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When To Actually Buy Insurance

The trigger is simple: the day someone depends on your income. If your parents need your salary for household expenses, you need term insurance now. If you get married and your spouse isn’t financially independent, you need it. When children arrive, you absolutely need it.

If you’re 23, single, and your parents have their own retirement sorted — there’s no urgency. But the moment dependents enter the picture, every month of delay is a gamble with their financial security. And premiums only go up with age. A 25-year-old buying ₹1 crore cover pays roughly half what a 35-year-old pays — and that premium difference lasts the entire 30–35 year policy term.

Buy early, buy adequate coverage, invest the rest yourself. That’s the entire strategy.