Premium Factors, Plan Types and 2026 Rules
Term vs ULIP vs endowment: which life policy fits your goal?
Term plans, ULIPs and endowment policies compared on cover per rupee, returns, charges, lock-in, surrender and tax, with a worked 20-year rupee example.
If your aim is to protect your family's income, a term plan wins: it buys the most cover per rupee because none of the premium goes into savings. A ULIP suits someone who wants market-linked investment and a modest amount of cover in one product, and is willing to hold it beyond the five-year lock-in. An endowment or money-back policy suits only a very conservative saver who values guarantees and forced saving above returns, and even then the cover it provides is usually far too small to protect a family. Many people end up with an endowment policy because it was sold as "insurance plus savings" without the comparison being done.
This guide belongs to the overview of life insurance in India. The figures below are illustrative to show how the products work; they are not quotes.
How each product works
| Term plan | ULIP | Endowment (non-linked) | |
|---|---|---|---|
| Death benefit | Sum assured | Higher of sum assured or fund value (as per policy) | Sum assured plus accrued bonuses or guaranteed additions |
| Survival benefit | None (TROP variants refund base premiums) | Fund value at maturity | Maturity sum assured plus bonuses, or a guaranteed amount |
| Typical cover | Many times annual income | Commonly 10 times the annual premium (the IRDAI minimum is lower and depends on age) | Often 10 times the annual premium or less |
| Where premium goes | Mortality cost and insurer expenses | Allocation, mortality and fund management charges; the rest buys units | Pooled in the insurer's participating or non-par fund |
| Investment risk | None | Borne by you | Borne by the insurer for guaranteed parts |
| Lock-in | None (no surrender value on regular term) | Five years | Surrender value usually after the first year or two; poor in early years |
| Transparency | High | Fund value and NAV published | Bonus rates declared yearly; returns hard to see |
The worked comparison over 20 years
Illustrative assumptions. A 30-year-old non-smoker has ₹1,00,000 a year to spend on life insurance and savings for 20 years.
Option A: Endowment. Premium ₹1,00,000 a year, sum assured ₹10 lakh, expected maturity value ₹30 lakh after 20 years (including bonuses, which are not guaranteed).
Option B: Term plus investment. A ₹1 crore term plan at ₹15,000 a year, and the remaining ₹85,000 a year (about ₹7,083 a month) invested at an assumed 8% a year.
| Option A: Endowment | Option B: Term + invest | |
|---|---|---|
| Cover during the 20 years | ₹10 lakh plus bonuses | ₹1 crore |
| Value after 20 years | ₹30 lakh (illustrative) | about ₹41.7 lakh before tax |
| Implied annual return on money paid | about 3.7% | 8% (assumed) on the invested part |
| If death in year 5 | ₹10 lakh plus bonuses to date | ₹1 crore plus the investments built so far |
How the 3.7% is calculated: it is the rate at which twenty yearly payments of ₹1 lakh, paid at the start of each year, grow to ₹30 lakh at the end of year 20. The ₹41.7 lakh is ₹7,083 invested at the end of every month for 240 months at 8%/12 per month. You can rerun this with your own figures in the buy term and invest the rest calculator.
The comparison only holds if you actually invest the ₹85,000 every year and do not withdraw it. If you know you will spend it, a disciplined product can be better than nothing. Even then, a term plan plus a recurring deposit, PPF or a monthly SIP gives you more cover and more flexibility.
Where ULIPs fit
A ULIP is a market-linked investment with insurance attached. Since IRDAI's ULIP rules capped charges, modern ULIPs are less costly than those sold before 2010, and some online ULIPs charge little or no premium allocation fee. Points to check:
- Charges: premium allocation, policy administration, fund management and mortality charges. The benefit illustration shows the net yield after charges at two assumed gross returns.
- Lock-in: you cannot withdraw for five years. If you stop paying in that period, the fund moves to a discontinued policy fund and is paid out after the lock-in ends, with a discontinuance charge capped by regulation.
- Cover: usually 10 times the annual premium. On ₹1 lakh a year, ₹10 lakh of cover is not enough for most families.
- Tax: for ULIPs issued on or after 1 February 2021, if the aggregate annual premium across your ULIPs exceeds ₹2.5 lakh, the maturity proceeds are taxed like capital gains on equity-oriented funds. See tax on life insurance payouts.
Return-of-premium term plans
A TROP plan refunds your base premiums if you survive. It sounds like free insurance. It is not.
Illustrative example. Regular term ₹16,000 a year; TROP ₹32,000 a year, both for 30 years. The TROP buyer gets back ₹9.6 lakh at the end (₹32,000 × 30). The extra ₹16,000 a year, invested at 7% at the start of each year, would grow to about ₹16.2 lakh. The refund is worth less than what the extra premium could have earned, and you also lose flexibility: stopping a TROP policy early often returns much less than you paid.
Decision checklist
- Do you have dependants or loans that your income supports? Start with a term plan sized to that need.
- Do you already hold an endowment or money-back policy? Check its sum assured. If it is small, add a term plan rather than surrendering in a hurry; see lapsed policy, revival and surrender.
- Do you want market-linked investment? Compare a ULIP's net yield after charges with a mutual fund's expense ratio, and accept the five-year lock-in only if you will hold for longer.
- Do you value guarantees above return? A guaranteed non-par plan may suit, but check the IRR in the benefit illustration and compare with safe alternatives such as PPF or bank deposits.
- Are you buying because of a tax deduction? The old-regime deduction is limited and does not apply in the new regime, which is the default. A product should make sense without the tax benefit.
Tax can change the comparison for large premiums; see tax on life insurance payouts. For what drives the term premium in Option B, see the premium factors guide.
Frequently asked questions
Should I surrender my endowment policy and buy term?
Not automatically. In the early years surrender value is low, and after many years the remaining premiums may buy a reasonable guaranteed return. Compare the surrender value now with the paid-up value and the value if you continue. Buy the term plan first, then decide.
Are ULIP returns guaranteed?
No. Fund value moves with the markets. The benefit illustration shows example values at two assumed gross rates, which are not promises.
Can a TROP plan be a good choice?
For someone who will not otherwise buy cover, perhaps. But for the same budget, a regular term plan with higher cover plus a separate investment usually leaves the family better protected.
Is whole life insurance useful?
It is useful when you want to leave a fixed sum regardless of when you die, for example for estate planning. For income replacement, cover until 60–65 is usually enough.
Sources
- IRDAI — regulations on linked and non-linked products, consumer guidance, benefit illustration rules
- Income Tax Department — tax treatment of maturity proceeds and ULIP thresholds
- India Post — current PPF and small savings rates for comparison
- Each product's sales brochure and benefit illustration on the insurer's website
