Term vs Endowment vs ULIP

An endowment policy bundles a small life cover with a debt-heavy savings fund and charges you for the packaging. A ULIP is an honest product with disclosed charges, but it is an investment wrapper you rarely need. Term is the only one of the three that does the job insurance exists to do.

The comparison that matters is against a risk-free alternative. The Public Provident Fund pays 7.1% a year, tax-free, for the quarter beginning 1 July 2026, set by the Ministry of Finance. Any bundled policy has to beat that after all its charges. Structurally, an endowment cannot.

How do the three compare on what they actually do?

Why can an endowment policy not beat PPF?

Look at what the money must pay for before it can grow. Three things come out of your premium.

First, the cost of the life cover itself. Second, distribution commission, which is front-loaded into the early years. Third, the insurer’s expenses and margin. What is left is invested, and non-linked funds are held largely in fixed income because the insurer has guaranteed you something.

So the gross return is a debt-market return. Then three layers of cost come off it. The result is a net return below a plain government-backed debt instrument, which has none of those costs. That is not a criticism of any particular insurer. It is arithmetic that applies to the product category.

The uncomfortable part is what happens if you stop. Under the IRDAI (Insurance Products) Regulations, 2024, a regular-premium traditional policy acquires a guaranteed surrender value only after premiums have been paid for two consecutive years. Stop in year one and the guaranteed value is nil. The 12 June 2024 master circular requires the insurer to pay a special surrender value after one full year’s premium where that is higher. You get the higher of the two, but a first-year exit is still close to a total loss.

When does a ULIP actually make sense?

A ULIP makes sense for someone who wants a long horizon, will not touch the money for well over the five-year lock-in, and values the insurer’s fund switching. Charges are disclosed. You choose the fund. That is more honest than an endowment.

It still loses to a term policy plus a direct mutual fund for most people, on cost and on flexibility. And the tax break has been narrowed. Under Section 10(10D), maturity proceeds of a ULIP issued on or after 1 February 2021 lose the exemption where annual premium exceeds ₹2,50,000. For non-linked policies issued on or after 1 April 2023, the exemption is lost where aggregate annual premium exceeds ₹5,00,000. Death benefits remain exempt in both cases.

So the tax argument for large bundled policies is weaker than it was. See ULIPs explained for the charge structure in detail.

What should you actually do?

1. Work out how much cover your dependants need. Our how much term cover page sets out the method.
2. Buy a term policy for that amount, for a term that runs to your retirement.
3. Add riders only where they solve a real gap. See term insurance riders.
4. Put the money you saved into PPF, an index fund or both, depending on your horizon.
5. Declare everything honestly on the proposal form. Non-disclosure is the biggest cause of rejected claims.

If you already hold an endowment policy, do not surrender it reflexively. Work out the surrender value you would receive, the premiums still due, and the maturity you would forgo. A policy close to maturity is often worth keeping. A policy two years in usually is not.