Cover Calculations and Buying Checklists
Buy term and invest the rest: does it beat an endowment policy? The arithmetic
Test buy-term-invest-the-rest against an endowment plan at 6%, 8% and 10% returns, with death-in-year-10 outcomes, where to invest the difference and the tax angle.
"Buy term and invest the rest" means buying a pure term plan for the life cover you need and investing, on your own, the money you would otherwise have put into an endowment, money-back or ULIP premium. It usually leaves your family better protected (because term cover is many times larger) and often better off at maturity, provided you actually invest the difference every month and choose investments whose risk you understand. The worked example below shows the outcome at 6%, 8% and 10% returns, what happens if you die in year 10, and when an insurance savings plan can still make sense.
This guide belongs to the cover amount guide. For a product-by-product comparison, see term vs ULIP vs endowment. All figures are illustrative.
The set-up
A 30-year-old has a budget of ₹1,00,000 a year for life insurance and long-term saving, for 20 years.
- Endowment route: ₹1,00,000 a year premium, sum assured ₹10 lakh, illustrative maturity value ₹30 lakh (bonuses are not guaranteed).
- Term + invest route: ₹1 crore term plan for ₹15,000 a year; the other ₹85,000 a year invested at about ₹7,083 a month.
Outcome at maturity under different returns
| Assumed return on the invested part | Value of ₹7,083 a month after 20 years | Compared with ₹30 lakh endowment maturity |
|---|---|---|
| 6% a year | about ₹32.7 lakh | about ₹2.7 lakh more |
| 8% a year | about ₹41.7 lakh | about ₹11.7 lakh more |
| 10% a year | about ₹53.8 lakh | about ₹23.8 lakh more |
Each figure is the future value of 240 monthly investments at one-twelfth of the annual rate, before tax. Even at 6%, which is close to what conservative deposits have paid over long periods, the investment route matches the endowment, and the family had ₹1 crore of cover instead of ₹10 lakh for twenty years.
Remember inflation: at 5% inflation, ₹41.7 lakh in 20 years is worth about ₹15.7 lakh in today's money (41.7 ÷ 1.05²⁰). The endowment's ₹30 lakh is worth less still. Long-term saving needs returns above inflation.
What happens if you die in year 10?
| Endowment route | Term + invest route (8% assumed) | |
|---|---|---|
| Life insurance payout | ₹10 lakh plus bonuses declared so far | ₹1 crore |
| Investments built up | none outside the policy | about ₹13 lakh |
| Total to family | roughly ₹10–13 lakh | about ₹1.13 crore |
This is the real point of buy-term-invest-the-rest. The maturity comparison is secondary; the family's protection in the years that matter is the main difference.
Where to invest the difference
| Option | Risk | Tax on gains (2026 position, check yearly) | Fits |
|---|---|---|---|
| PPF | Very low; rate set by government each quarter | Tax-free interest and maturity; old-regime deduction within the ₹1.5 lakh limit | Safe part of long-term saving; 15-year account, extendable in blocks of 5 years |
| Voluntary PF (VPF) for salaried | Very low | Interest is taxable on employee contributions above a yearly threshold | Salaried people with EPF |
| Bank RD or FD | Low | Interest taxed at slab rate | Short and medium goals |
| Equity mutual fund SIP | High in the short run, historically higher returns over long periods | Long-term gains above ₹1.25 lakh a year taxed at 12.5% (rates from 23 July 2024) | Goals 10+ years away |
| Hybrid / balanced funds | Medium | Depends on equity share | People who want lower swings |
Illustrative PPF-like path. Investing ₹85,000 at the start of each year at 7.1% for 20 years gives about ₹37.7 lakh, tax-free. PPF rates are revised by the government each quarter, so check the current rate with India Post or your bank. A mix of PPF and an equity SIP is common.
When an insurance savings plan can still make sense
- You know you will not save unless it is compulsory, and the guaranteed return in the benefit illustration is acceptable to you.
- You want a guaranteed sum on a fixed date for a specific goal and value certainty over return.
- You already hold an older policy where most premiums are paid and the remaining premiums buy a reasonable return.
Even then, buy a term plan for the cover first. A savings plan's small sum assured should not be your family's protection.
What to do with an existing endowment policy
Do not surrender in a hurry. Compare three numbers from the insurer:
- Surrender value today.
- Paid-up value if you stop paying: typically the sum assured reduced in proportion to premiums paid, plus bonuses already attached. For example, ₹10 lakh × 5 years paid ÷ 20 years = ₹2.5 lakh paid-up sum assured, plus accrued bonuses (illustrative).
- Projected maturity if you continue, from the benefit illustration.
If the policy is young and the surrender value is very low, making it paid-up and redirecting future premiums can be better than surrendering. If most premiums are paid, continuing may be fine. See lapsed policy, revival and surrender for the rules.
Discipline checklist
- Set up the SIP or PPF transfer on the same day your salary arrives.
- Increase it each year when your income rises.
- Do not count the investments as spare cash; label them for retirement or children's education.
- Review the term cover every few years with the life cover calculator.
- Rerun your numbers in the term + invest calculator with a cautious return.
Before you act on the comparison, size the term cover properly with the human life value worked example, and check quotes for that cover with the quote comparison guide.
Frequently asked questions
Is it risky to invest the difference in equity funds?
Equity values fall sharply at times. Over long periods they have generally beaten deposits, but there is no guarantee. Keep money needed within a few years in safer instruments.
What about the old-regime tax deduction on endowment premiums?
It is limited to ₹1.5 lakh shared with PPF, ELSS, EPF and others, and is not available under the new regime. PPF and ELSS also qualify under the old regime, so the deduction rarely tips the decision towards an endowment policy.
Does buy-term-invest-the-rest work for a 45-year-old?
The logic is the same, but term premiums are higher and the time to invest is shorter. Calculate both routes with your actual quotes.
Sources
- India Post — current PPF and small savings interest rates
- Securities and Exchange Board of India — investor education on mutual funds and risk
- Income Tax Department — tax treatment of PPF, mutual funds and insurance maturity proceeds
- IRDAI — rules on surrender and paid-up values
