Term insurance vs endowment and ULIPs: what your premium buys
Pure protection or insurance-plus-savings? How term, endowment and ULIP plans differ, and a simple way to think about how much life cover you need.
Life insurance has one core job: if you die early, the people who depend on your income should not also lose their home, their education plans or their standard of living. Yet many Indian households own policies that do this job poorly — they hold insurance that is mostly a savings product, with cover far too small to replace an income.
Three kinds of policy
Term insurance is pure protection. You pay a premium for a fixed term, say until age 60. If you die within the term, your nominee receives the sum assured. If you survive, nothing is paid back. Because the insurer only pays in the less likely case, the premium is relatively low for a large cover.
Endowment plans combine life cover with savings. If you die during the term, the nominee gets the sum assured plus any bonuses. If you survive, you get a maturity amount. Traditional plans may be “with-profit”, with bonuses that are declared over time and are not guaranteed in advance, or offer fixed guaranteed returns.
ULIPs (unit-linked insurance plans) also combine cover and investment, but the investment portion goes into market-linked funds you choose — equity, debt or a mix. Returns depend on markets, and the plan carries charges for premium allocation, policy administration, fund management and mortality. ULIPs have a five-year lock-in.
What you’re actually paying for
Every bundled plan does two things with your premium: buys some life cover, and invests the rest after charges. The trade-off is that the cover is usually small relative to the premium, and the savings portion’s return is reduced by the cost of that cover and the plan’s charges.
Here is an illustration with made-up numbers:
| Endowment plan (illustrative) | Term plan | |
|---|---|---|
| Annual premium | ₹1 lakh | Much lower for the same cover |
| Life cover | ₹12 lakh | Can be ₹1 crore or more |
| On survival | Maturity amount | Nothing |
| Main purpose | Saving with some cover | Replacing income |
If ₹12 lakh of cover costs ₹1 lakh a year in an endowment plan, getting ₹1.5 crore of cover the same way would need a premium in the region of ₹12 lakh a year — far beyond most budgets. That is why bundled plans so often leave families underinsured.
Actual premiums depend on age, health, smoking status, term and insurer. Get quotes from several insurers and compare the policy wording, not just the price.
Many planners suggest the approach often summarised as “buy term and invest the rest”: take adequate term cover, and invest the difference separately in instruments that suit your goals. That only works if you actually invest the difference rather than spend it.
How much cover? Two approaches
1. The income-multiple rule of thumb
A common shortcut is cover of 10 to 15 times your annual income. It’s quick and easy to remember. Treat it as a starting point, not a precise answer — it ignores your debts, your goals and what you have already saved.
2. The needs-based tally
Add up what your family would need, then subtract what’s already available.
Worked example (illustrative): Rahul, 32, earns ₹15 lakh a year. His spouse works part-time and they have one child.
| Needs | ₹ |
|---|---|
| Outstanding home loan | 40 lakh |
| Child’s education fund (future goal) | 30 lakh |
| Household expenses: ₹8 lakh a year for 15 years | 1.2 crore |
| Total needs | 1.9 crore |
| Less: existing savings and investments | (20 lakh) |
| Cover required | about 1.7 crore |
The income-multiple approach would have suggested ₹1.5–2.25 crore, so the two methods roughly agree here. The household-expense line is deliberately simple: it ignores both inflation, which raises the need, and the returns the money would earn, which reduce it. A financial planner can model this more carefully.
Practical points
- Choose a term that ends when dependants stop needing your income — often around retirement age.
- Disclose health and habits honestly. Undisclosed conditions or habits can give an insurer grounds to dispute a claim.
- Check the insurer’s claim settlement record in the annual data published by IRDAI.
- Register a nominee and tell your family where the policy documents are.
- Review cover after marriage, a child, a home loan or a big salary jump.
- Tax benefits on premiums and payouts depend on current tax law and your chosen regime; check the latest rules or try our income tax calculator.
What to do
- List your existing policies and write down the actual life cover each gives — not the premium.
- Work out your need using both methods above.
- Fill the gap with term insurance if your current cover falls short.
- Before surrendering an existing endowment plan or ULIP, check the surrender value, charges and tax impact — exiting early can be costly. Sometimes making it “paid-up” is the better option.
- Keep protection and investment as separate decisions from here on.
This article is educational and is not insurance or financial advice. Read the policy document carefully and consider an IRDAI-licensed adviser.
This article is for education only, not personalised investment, tax or legal advice. Rules and rates change. Check the latest official sources or a qualified professional before acting. Spotted an error?Tell the editor.
