Endowment Plan vs Term Plan: Which Life Insurance Option Is Right for You?

Term Plan vs Endowment Plan: Which One Is Right for You? A term plan offers pure life cover at low premiums. If the policyholder dies during the term, their family receives the full payout. There’s no return if the policyholder survives. An endowment plan includes both life cover and a savings component. The family receives the sum assured on death. If the policyholder survives, they get a maturity benefit. But these plans come at a much higher cost and deliver modest returns.

When it comes to life insurance, two popular options often come up: Term Plans and Endowment Plans.

Term plans are often the smarter and more cost-effective choice as they offer high coverage at a low cost, giving your family the financial protection they need without locking your money into low-return products. Endowment plans, on the other hand, combine insurance with savings but come at a significantly higher price and deliver modest returns. They may only make sense if you're highly risk-averse, not eligible for term insurance, or are opting for a low-cost version.

In this guide, we break down how these plans differ, what each one offers, and how to decide which makes more sense for your goals.

We believe smart insurance decisions start with clarity, and that’s why we'll guide you through both plans, so you're never left guessing. If you need one of our expert advisors to help you, book a call at your convenience. No hard sell. Just clear, honest advice to help you safeguard what truly matters.

Key Differences between Endowment Plan and Term Plan

The differences between these plans extend far beyond premium amounts. Understanding these distinctions is crucial for making the right choice:

Aspect	Endowment Plan	Term Plan
What’s the goal?	Limited protection with forced savings	Pure life protection
Premium Cost	High (₹60,000-1,00,000 for ₹10-25 lakh)	Low (₹12,000-25,000 for ₹ 1 crore; as no investment is involved)
How much cover?	Lower (5-10x annual premiums)	High (20-30x yearly income)
Maturity Benefit	Yes, but comes at a high cost	Nil (unless Return of Premium opted)
Returns	4–6% (barely beats inflation)	Not applicable
Where does your money go?	Split between insurance and savings	Only to insurance
Flexibility	Mostly rigid, limited customisation	More choices and add-ons
Surrender Value	Available after 1-3 years	Nil or minimal
Best For	Only worth considering if premiums are very low	Those wanting maximum coverage at a low cost
Liquidity	Money is locked until maturity	Premium savings can be invested in redeemable FDs, mutual funds
Inflation Protection	Fixed benefits lose purchasing power	Can increase coverage over time or buy an additional term plan

As the table shows, term plans cost dramatically less while offering significantly higher life cover. In contrast, endowment plans come with high premiums, low returns, and limited flexibility. For most buyers, these trade-offs are rarely justified unless you are risk-averse, ineligible for term insurance, and choosing a low-cost policy.

What Do You Get Under Each Plan Type?

When choosing between a term plan and an endowment plan, once you really understand what each one brings to the table, the choice becomes way easier. Let’s break down the coverage and benefits so you know what you’re signing up for.

What Is Covered Under Term Plans?

A term insurance plan keeps things simple, it’s low-cost,  and built to protect your family financially if something happens to you during the policy term. 

Here’s what you typically get under a term plan:

1. Death Benefit: If you pass away during the policy term, your nominee (usually a family member) will receive the full sum assured as a lump sum payout.
2. Terminal Illness Cover (Optional): This benefit offers an accelerated payout if the policyholder is diagnosed with a terminal illness such as late-stage cancer or end-stage organ failure. Instead of waiting until death, the insurer disburses a part or, in some cases, the full sum assured early to provide financial relief during this critical time.But how much is actually paid out under terminal illness cover?
   
   Well, that depends on the insurer and the specific terms of the policy. Let’s look at a few examples:
   1. Tata AIA offers up to 50% of the sum assured, and there’s no fixed limit on the amount.
   2. Axis Life and HDFC Life provide coverage up to ₹1–2 crore, depending on the plan.
   3. ICICI Prudential pays out the entire sum assured upon diagnosis of a terminal illness.

So, while some insurers offer partial payouts, others may release the entire sum assured upfront. That’s why it’s crucial to go through the policy wording carefully to understand exactly what’s covered and how much your family would receive.

3. Riders (Add-ons at Extra Cost): You can enhance your term plan with riders, which are optional benefits:
   1. Accidental Death Rider: An extra payout if death occurs due to an accident.
   2. Waiver of Premium: Future premiums are waived if you become permanently disabled or critically ill, so your policy stays active even if you can’t pay.
   3. Critical Illness Rider: A lump sum if you’re diagnosed with a major illness like heart disease or cancer.

At the end of the day, a well-chosen term plan ensures your family’s financial security without compromising your present savings. It gives you the freedom to use the rest of your income to invest, grow wealth, or meet current goals.

What Is Covered Under Endowment Plans?

Endowment plans combine life insurance with a built-in savings component. While they do provide a payout on both death and survival, it's important to understand what you're signing up for, especially given the high costs and modest returns.

Here’s what an endowment plan typically includes:

1. Lower Coverage: Unlike term insurance (which can offer cover worth 10–20 times your annual income), endowment plans offer relatively lower life cover, often just 5–10 times the annual premium. That’s because a major chunk of your premium is used for the investment portion of the policy.
2. Higher Premiums: Endowment plans can cost 10–30× more than term insurance for the same coverage. That’s because a chunk of your premium is diverted to the savings portion, which offers low returns and reduces your life cover.
3. Loan Facility: Some plans allow you to loan against the policy after a few years. While this offers limited liquidity, it shouldn't be the primary reason to invest, especially when more flexible and higher-yielding investment options are available.
4. Guaranteed Returns: Most endowment plans offer predictable returns, typically in the range of 4–6% per annum. While these returns are stable, they barely keep up with inflation, and may not justify the significantly higher premiums.
5. Dual Benefit: If the policyholder passes away, the nominee receives the death benefit. If the policyholder survives the term, they receive a maturity payout. But this comes at a steep cost; you're essentially paying extra for the savings component, which delivers limited returns.
   
   - Death Benefit: In case of death during the policy term, the nominee gets the sum assured, sometimes along with accrued bonuses. While this offers a degree of financial support, similar or better coverage can be obtained at a much lower cost through term insurance.
   
   - Maturity Benefit: If you survive the term, you receive a lump sum, usually the sum assured plus bonuses (if it’s a participating policy). However, this benefit often masks the fact that your returns are modest and your insurance coverage is limited.

Above all, Endowment plans offer predictability, but that stability comes at the cost of both return potential and adequate life cover.

Let’s compare an actual endowment & term plan: HDFC Life Sanchay Plus vs HDFC Click 2 Protect Super

Feature	HDFC Life Sanchay Plus (Endowment)	HDFC Click 2 Protect Super (Term)
Type	Savings + Life Cover	Pure Life Cover
Annual Premium	₹1,00,000	₹26,000 (approx)
Total Premium (10 years)	₹10.25 lakhs	₹2.73 lakhs
Life Cover	₹12.87 lakhs	₹1 crore
Maturity Value	₹47.4 lakhs (after 30 years)	None

If your goal is pure protection, term plans deliver better value,” says Swapnil, a senior advisor at Ditto. “The ₹7.5 lakh you save in premiums can be invested in mutual funds or PPF, giving better long-term returns without compromising insurance coverage.

This comparison shows just how skewed the value is. Term plans provide far more cover and allow for better use of your remaining budget. On the other hand, endowment plans simply don’t justify their price for most policyholders.

How is the premium in an endowment plan used?

When you pay ₹1 lakh per year for an endowment policy, a large portion of your premium goes toward agent commissions, administrative costs, and insurance charges. In the first year, only about 50–60% of your premium is actually invested. This improves over time, with around 70–85% being invested from the third year onward.

That invested amount is typically placed in low-risk, debt-heavy instruments as per IRDAI guidelines. But even then, endowment plans generally yield around 4–6% per annum after accounting for all expenses.

This is why, for most people, a combination of term insurance and separate market-linked investments offers better long-term value.

Endowment Plan vs Term Plan: How to Choose the Right One?

Choosing between a term plan and an endowment plan can feel confusing, especially when you're juggling financial goals, responsibilities, and limited budgets. But don’t worry, it’s not as complicated as it seems. Let’s break it down in a way that actually helps you decide.

The ‘right’ plan depends on your life stage and what you want your insurance to do for you.

1. Just starting out in your career? A term plan is usually the smartest pick. It gives you high coverage at a low premium, making sure your family is financially protected without eating into your salary. Perfect if you're supporting your parents or just beginning your financial journey.
   
   If you're 25, healthy, and looking for a ₹1 crore term insurance cover, here's a quick premium comparison of some of the most trusted plans in the market to help you choose wisely.

Insurer & Plan	Annual Premium
ICICI iProtect Smart Plus	₹12,123 /‑ p.a.
HDFC Click 2 Protect Super	₹12,539 /‑ p.a.
Axis Max Smart Term Plan Plus	₹11,628 /‑ p.a

Note: Premiums shown are for a healthy, non-smoking male aged 25, earning ₹10 lakh per annum, for a ₹1 crore life cover till age 65 (35-year policy & payment term). Final rates may vary based on discounts, riders opted, and underwriting.

2. Prefer to save while staying insured? That’s the pitch behind endowment plans, but in reality, they offer life cover along with a maturity benefit at a much higher cost and deliver modest returns, often locking up your money for decades.
3. Married or have kids? A term plan continues to shine here too. It acts as a solid financial safety net for your spouse and children, ensuring that they’re secure even if something were to happen to you.

When it comes to pure protection and affordability, term insurance clearly wins. It provides significantly higher life cover at a fraction of the premium and frees up your remaining money to invest as you see fit, whether in mutual funds, PPF, or other growth-oriented avenues.

So take a moment to reflect: do you want cost-effective, high-coverage protection with the freedom to grow your money, or are you okay with paying more for limited cover and conservative returns just because it feels convenient?

How to Combine Protection and Long-Term Savings?

The smartest approach is to combine a pure term insurance policy with high-return investment options. This gives you robust life cover at a low cost and the potential to grow your savings meaningfully over time. It’s a smart mix that covers both your “what if” and “what next” scenarios.

Instead of locking your money into a low-yield bundled product, you can do this:

1. Buy a high-cover term plan based on your income and responsibilities.
2. Invest the rest of your budgeted premium into mutual funds (SIP), PPF, or NPS, depending on your risk appetite and goals.
3. Over 15–20 years, your investments can generate significantly higher returns, giving you a much larger corpus than an endowment plan ever could. 

It’s a small step with a big heart, protecting your loved ones today while gently building tomorrow’s dreams.

Quick Comparison: Endowment Plan vs Term Plan + Mutual Fund

Let’s say you have a budget of ₹1 lakh per year and want life cover plus long-term returns. You could either go for an endowment plan or split the same budget between a term plan and a mutual fund SIP.

Option	Life Cover	Long-Term Value	Flexibility
Endowment Plan	~₹10–15 lakhs	~₹44 lakhs (at 6% IRR)	Low
Term + Mutual Fund	₹1 crore	₹50–₹80+ lakhs (at 8–12%)	High

Put simply, if you want better life cover and more money in the long run, Term Plan + Mutual Fund is the smarter, more flexible choice. Endowment plans might feel “safe,” but they cost more and give less.

Did you know? 1. CAGR (Compounded Annual Growth Rate): Shows the average yearly growth for one-time investments, assuming steady compounding. 2. IRR (Internal Rate of Return): Reflects the actual annual return for investments with regular payments (like ₹1L/year), factoring in all inflows and outflows.

Note: Endowment plans only make sense when costs are low, and even then, they suit very specific needs. Most people are better off exploring more flexible and rewarding alternatives.

Who Should Buy What and When?

Choosing between a term plan and an endowment plan is less about comparing product brochures and more about understanding your needs, risk tolerance, and eligibility.

For most people, a term plan is the default choice. It offers the highest life cover at the lowest cost. This means your family is financially protected without draining your income or locking your savings into low-return instruments. Term plans work especially well for young earners, parents, and single-income households because they free up the rest of your money for higher-return investments like mutual funds, NPS, or PPF.

On the other hand, endowment plans are niche products. They combine insurance with a guaranteed savings component, but the trade-offs are significant: high premiums, lower life cover compared to term insurance policies, and modest returns (typically 4–6% post-expenses). Even when compared to conservative investment options like PPF (currently at ~7.1% p.a.), endowment plans fall short.

Their relevance is mostly limited to cases where buyers are either:

1. Ineligible for term insurance (due to age, health, or unstable income),
2. Extremely risk-averse, or
3. Have access to a low-cost endowment product with transparent terms.

In such cases, endowment plans can act as a forced savings tool. But even then, buyers must be aware that early exits lead to losses, and long-term commitments are required to see even modest gains.

Quick Guide: Term vs Endowment

Plan Type	Best For	Why it works
Term Plan	Most buyers with dependents and regular income	Low premium, high cover. Leaves room to invest separately for better growth
Endowment Plan	Risk-averse or ineligible for term cover	Bundled savings + insurance. Forced savings mechanism for those struggling to save consistently

Think of insurance as protection, not an investment. Your main goal should be to secure your family’s future, not chase returns through your insurance plan. As discussed above, the more financially prudent approach is to buy a low-cost term plan and invest the savings (the premium difference) in mutual funds, PPF, or NPS that offer better returns than endowment plans in the long run.

Endowment Plan vs Term Plan: Is There a Waiting Period or Lock-in?

This is something most people overlook, but it matters more than you think.

Let’s break it down simply.

Term insurance covers all types of death from day one, whether it’s due to illness, accident, or natural causes. The only exception is death by suicide, which is typically covered only after one year of policy issuance.

There’s no lock-in in the traditional sense. If you stop paying premiums, the policy lapses, but you’re not penalised financially. And if you ever feel you no longer need the cover, you can simply stop renewing it.

But it’s a different story with endowment plans. These plans come with a mandatory lock-in of 2–3 years. That means even if you change your mind, you can’t exit easily. And if you surrender early, you’ll likely get much less than what you paid in, sometimes nothing at all, during the first few years.

In Endowment plans, if you surrender early, you lose money.

1. Year 1: No payout
2. Year 2: ~30% of premiums paid
3. Year 3: ~35%
4. Years 4–7: ~50%
5. Last 2 years before maturity: up to ~90%

Returns only look decent if you stay invested till maturity (15–20 years). Early exit often means losing a big chunk of what you’ve paid.

Can You Switch from a Term Plan to an Endowment or Vice Versa?

What if you bought a plan, but a few years down the line, your goals change? Can you switch?

Switching from Term to Endowment?

Not really, at least not in today’s context. While some older term insurance plans used to offer a “conversion” option, allowing you to shift to an endowment plan after a few years, this feature has largely disappeared from the Indian insurance market.

Earlier, if the switch was made within a specific timeframe, no fresh medical tests were required, and the new plan would continue with adjusted premiums. But today, most term plans in India do not include any such convertibility clause. It’s no longer a standard feature, and very few insurers offer it anymore.

LIC's Convertible Term Assurance Plan, now withdrawn, was a term insurance policy with a unique feature: it allowed policyholders to convert it into an endowment plan within a set timeframe, usually before age 45 or 50. This gave flexibility to those who started with affordable term cover but later wanted a savings component, making it ideal for changing financial goals or risk preferences.

Even in rare cases where it is available:

1. The premiums will increase significantly since you're now adding a savings component.
2. The conversion must be done within the time limit defined by the insurer.
3. You might still be better off buying a new plan altogether.

Why is it rare today?

Low demand, IRDAI’s product simplification norms, and insurers now prefer offering riders over complex conversions.

Switching from Endowment to Term? That’s the tough part. Here’s where it gets complicated. If you bought an endowment plan but later realise you’d rather just have life cover, you can’t convert it into a term plan. You can’t switch it the other way. Your only options?

1. Surrender the plan, but if it’s still early days (within the first 2–3 years), you might get nothing back.
2. Or, make it paid-up; this simply means you stop paying any more premiums, but the policy doesn’t end. It stays active, just with lower benefits, and you’ll still get a smaller payout when it matures. The final payout depends on how early you stopped paying the premiums.

Why Should You Approach Ditto for Your Insurance Plans?

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Just send us a message on WhatsApp or book a free consultation with a Ditto advisor. We’ll break things down clearly and be right by your side, every step of the way.

Conclusion

Choosing a life insurance plan isn’t just about money. It’s about aligning your choice with your goals, responsibilities, and comfort with risk. Term plans offer low-cost protection and the flexibility to invest separately. Endowment plans offer guaranteed returns but at a significantly higher cost.

There is no universal best option. If you are financially disciplined and comfortable managing your own investments, a term plan paired with mutual funds, PPF, or NPS is likely to offer better long-term value. If you prefer simplicity and assured payouts, endowment plans may still be worth considering.

To understand why endowment plans remain popular, it helps to look back. Between the 1990s and early 2010s, Indian households had limited investment options. Term insurance and mutual funds were either inaccessible or poorly understood, while LIC’s government backing created deep trust.

The mindset then was straightforward: if you pay premiums for years, you should get something in return. This reinforced a strong preference for bundled insurance products.

That mindset persists today, often supported by tax-saving incentives and exaggerated benefit illustrations. A ₹10 lakh maturity benefit may sound appealing, but many overlook the fact that other instruments could have delivered better outcomes.

The good news is that this is starting to change. Younger buyers are asking sharper questions. They understand the trade-off between protection and returns. Many now approach insurance as it should be, purely for risk cover, and choose separate tools for wealth creation.

Endowment plans may still suit those who are highly risk-averse or ineligible for term insurance (only if the policy is low-cost). But for most people, separating insurance from investment leads to clearer decisions and more efficient financial outcomes.

Frequently Asked Questions (FAQ) on Term Plan vs Endowment Plan