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Endowment plan or term insurance plus investing?
A traditional plan does two jobs with one premium: it covers your life and it saves for you. The alternative is to do the two jobs separately, with a term plan for the cover and an investment for the saving. Here is how the two compare on one real set of numbers, and the cases where the endowment is the better choice.
The short answer
For most people with a family to protect, term cover plus a separate investment gives more money, more cover and easier access to the money. The endowment is the better choice in a few narrow cases, and they are listed below.
- Choose term plus investing if people depend on your income and you can invest steadily on your own.
- An endowment can make sense if your only other option is a taxable FD in the 30% slab, or if you already hold one with many years paid.
- Check first: what the plan pays, as a yearly rate. The endowment calculator tells you in a minute.
One plan, worked through
Take a guaranteed-income plan of the kind sold widely today. You pay ₹30,000 a year for 10 years, ₹3 lakh in all, and you receive ₹3 lakh in year 20 and ₹83,446 a year for the five years after that, so ₹7,17,230 comes back in total. That sounds like more than double your money, but because it comes back so late, the yearly return works out to about 5.15%.
Now put the same ₹30,000 a year for the same 10 years into an account that pays 7.1% a year, tax-free, which is what PPF pays for October to December 2026, and leave it there.
| Where the money goes | Yearly return | By year 25 |
|---|---|---|
| The guaranteed-income plan (payouts kept at 7.1% as they arrive) | 5.15% | ₹9.04 lakh |
| An account paying 7.1% tax-free | 7.1% | ₹12.48 lakh |
The account has about ₹8.86 lakh by year 20, which is already more than the ₹7.17 lakh the plan pays out over years 20 to 25, and the gap keeps growing after that. To be fair to the plan, its payouts are fixed for the full 25 years, while the PPF rate is reset by the government every quarter and has come down over the years, so the table assumes 7.1% holds. Even at 6.5% the account would still be ahead.
The cover is usually small
For the payout to stay tax-free under Section 10(10D), the yearly premium of a policy issued after April 2012 has to be within 10% of the sum assured, so the life cover only needs to be ten times the premium, and many plans are built close to that. On a ₹30,000 premium that is about ₹3 lakh of cover. A family that depends on your income usually needs ten to fifteen times your yearly income, which the term cover calculator works out for you, and a pure term plan buys that much cover for a fraction of what the same cover costs inside a traditional plan.
Getting to your money
A traditional plan is the hardest of these to get out of early. The surrender value in the first years is usually well below what you have paid, and for plans sold from 1 October 2024 a surrender value is payable only after the first full year's premium. PPF lets you take out part of the balance once a year from the seventh financial year, and a mutual fund can be sold on any working day, apart from the three-year lock-in on tax-saving ELSS funds.
When the endowment is the better choice
The honest answer is that it wins in some cases, and these are the ones I would accept:
- Your other option is a bank FD and you are in the 30% slab. An FD at 7% leaves you about 4.8% after tax and cess, which is less than a plan paying 5.15% tax-free. PPF still beats both, as long as you have room in its ₹1.5 lakh yearly limit.
- You already hold a plan with many premiums paid. The early costs are behind you, so continuing can pay well from here, and the surrender check shows whether it does.
- You have used up PPF and EPF, you want a fixed sum on a fixed date with no market risk at all, and you accept a lower return for that certainty.
- You know that money left in a savings account will get spent. A premium is hard to skip, and that does work for some people, but the price of that discipline is the gap in the table above.
When term plus investing wins
In most other cases. If people depend on your income, the cover matters more than the return, and a term plan gives you the right amount of it. If you are in your thirties or forties with fifteen years or more to go, the gap in the table grows with time. And if you may need the money early, both PPF and mutual funds are easier to get out of than a traditional plan.
The move
Before you sign a traditional plan, ask for the guaranteed payouts in writing and put them into the endowment calculator to see the yearly return. If it is below what PPF pays, buy a term plan for the cover and put the rest of the premium into PPF or an index fund. If you already hold one, do not surrender it in a hurry; run the surrender check first.
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