Endowment Policy vs Term + Invest

Worked Examples

Assume a 30-year-old wanting cover until 60. The point of this table is the structure, not any particular quotation.

Row four is where endowment policies do the most damage in practice. A large share of policies are surrendered in the early years, and early surrender values are usually well below the premiums paid. The structure punishes the exact behaviour it is most likely to produce — a long, inflexible commitment sold to people whose circumstances change.

How Each Is Taxed — including the thresholds most people have not heard of

The maturity exemption is no longer automatic. For a life insurance policy to pay out tax-free on maturity, the premium must not exceed a set percentage of the sum assured — 10% for policies issued on or after 1 April 2012, and 20% for older ones (15% for certain specified persons for policies issued on or after 1 April 2013). Many endowment policies sit close to that line, which is worth checking on your own policy document rather than assuming.

Two premium thresholds were added, and they catch larger policies. For ULIPs issued on or after 1 February 2021, the maturity exemption is not available where the annual premium exceeds ₹2.5 lakh. For other life insurance policies issued on or after 1 April 2023, it is not available where the aggregate annual premium across policies exceeds ₹5 lakh. Note the word aggregate — it is measured across your policies, not per policy, which is precisely how people find themselves over the line without realising. The death benefit remains exempt regardless of these thresholds.

On the term-plus-invest side, the term premium qualifies under 80C — old regime only — and the death benefit is exempt. The investments are taxed on their own terms: an equity fund at 12.5% above ₹1.25 lakh after twelve months under section 112A, and 20% below twelve months under 111A. That is more tax visibility, not necessarily more tax, and it comes with the ability to control when gains are realised.

Check your own policy document for the premium-to-sum-assured ratio and your aggregate annual premium before assuming the maturity proceeds are exempt.

Advantages and Limitations

How to Decide

Two questions settle most cases.

1. How much cover does your family actually need? Work this out first, in rupees. Then ask what each structure costs to provide it. An endowment almost never provides adequate cover at a premium anyone would pay.
2. Will you genuinely invest the difference? Be honest. If the money would be spent, the endowment’s inflexibility is doing something useful for you, and the comparison is closer than the arithmetic suggests.
3. How long will you keep paying? If there is real doubt, avoid endowment. Early surrender is where most of the value is lost.
4. Check the tax conditions on any policy you already hold. The premium-to-sum-assured test and the ₹2.5 lakh and ₹5 lakh thresholds decide whether the maturity amount is exempt.
5. Separate the two jobs. Insurance protects your family against your death. Investment grows your money. Almost every product that promises both does one of them poorly.

For most people with dependants, term cover sized properly plus a simple index or diversified equity fund is both cheaper and more transparent. The endowment’s real advantage is behavioural, and that advantage is worth something — but it should be chosen deliberately, not because the cover looked incidental.