Life Insurance in India: Term vs Endowment and How Much Cover You Need

Most people buy life insurance the wrong way round. A relative or a bank relationship manager sells an endowment plan, the premium feels like forced saving, and fifteen years later the family finds the cover was small and the maturity amount barely beat a fixed deposit. Buy the cover first. It is cheaper than most people expect, and it is the one product here that does the job you bought it for.

Life insurance does one thing: if you die, your dependents get a lump sum. Maturity benefits, bonuses and fund values are a savings product wearing that cover as a coat. Whether to mix the two is the first decision, so start there.

Term, endowment, whole life, ULIP: what each one really sells

Type	What you get	Where it pinches
Term plan	Sum assured if you die during the term, nothing if you outlive it	Feels like wasted money if you live long. That is the design
Endowment or money-back	Death cover plus a guaranteed maturity amount	Cover is usually small for the premium, returns are modest, money is tied up for years
Whole life	Cover to a very old age, often 99 or 100	Premium is high for the cover; mostly useful for estate planning
ULIP	Cover plus a market-linked fund	Charges bite in the early years, five-year lock-in, cover is often a small multiple of premium
Return-of-premium term	Term cover plus your premiums back at the end	Costs far more than plain term; the refund arrives decades later with no interest

A plain term plan is the only one where nearly the whole premium is cover. That is why a person in their thirties can often buy ₹1 crore or more of cover for a yearly premium much smaller than a savings plan of similar size would need. I am not printing a premium because it moves with age, tobacco use, health, income and insurer, and any number would be stale soon. Get live quotes from two or three insurers at the same cover, the same end age and the same payout option.

Return-of-premium plans deserve a warning. They sell the comfort of getting your money back. You do, after 25 or 30 years, with nothing for the wait, after paying a much higher premium than plain term. If you invest that extra premium yourself, you will most likely end up ahead.

How much cover: a worked example

The rule of 10 to 15 times annual income is a fair first guess, but it wobbles when someone has a home loan or three children. A better method is to add up what the family would need and subtract what they already have. These numbers are illustrative, made up for the arithmetic.

Rohan is 32 and earns ₹12 lakh a year. His wife does not work, their child is 3, the home loan outstanding is ₹40 lakh, household spending is ₹6 lakh a year and existing savings are ₹15 lakh.

• Clear the home loan: ₹40 lakh
• Child’s education and marriage fund, in today’s money: ₹40 lakh
• Fifteen years of household expenses without his salary: ₹90 lakh (₹6 lakh × 15, ignoring inflation)
• Less existing savings: minus ₹15 lakh

The total is about ₹1.55 crore, roughly 13 times his income. Here the thumb rule and the sum agree. They often will not, so do the sum. Round up rather than down, because inflation eats cover quietly. Run the plan to an age when loans are gone and the youngest dependant can stand on their own, often 60, not to some arbitrary 30-year term. And buy enough early: topping up after a health scare is hard or expensive.

Claim settlement ratio: read it, then read past it

The IRDAI annual report publishes, for each life insurer, the share of individual death claims it settled. Published summaries of the 2024-25 report put the industry figure near 98.4 per cent by number of claims, and a little lower by amount. Pull the latest insurer-wise table from irdai.gov.in because it changes every year.

A high ratio is a good sign and a poor decision tool. Two or three percentage points separate most large insurers, which tells you little about how your own claim will go. The ratio also counts only claims that were filed, so a family that never knew a policy existed is not in it. Look at the ratio by amount as well as by count, look at three years instead of one, and look at how long settlement takes.

Why claims actually get rejected

Rarely because an insurer is hunting for a reason. Usually because the application said something untrue. The usual suspects: tobacco ticked as no, drinking understated, diabetes or blood pressure left out, a past surgery forgotten, income exaggerated to qualify for a higher cover, or a policy that quietly lapsed because the premium was missed beyond the grace period. Most policies also exclude suicide in the first year. Read that clause.

The law gives you real protection here. Under Section 45 of the Insurance Act, as amended in 2015, an insurer can question a policy only within three years of it starting, being revived or having a rider added. After that it cannot repudiate for misstatement. Inside the three years it must show the fact was material and that it was withheld or misstated. None of this is a licence to fudge, because the first three years are when scrutiny is sharpest. Fill the form yourself instead of letting an agent tick no everywhere to speed up the sale, keep a copy, and tell your nominee where the papers are.

Riders, old policies and tax

Riders are cheap because they pay in narrow cases. An accidental death rider pays only when death is accidental as the policy defines it. A critical illness rider pays only for the listed conditions at the listed severity. Read the definitions before the price. A waiver-of-premium rider is useful if you are the only earner.

If you already hold an endowment policy, buy the term plan first and decide about the old one afterwards. IRDAI’s surrender value rules were revised from October 2024 and early exits are less harsh than before, but you still lose a chunk in the early years. Ask the insurer for both the surrender value and the paid-up value, then compare them with simply carrying on.

Tax treatment of premiums and of maturity or death proceeds has conditions, and the Income-tax Act 2025 replaced the 1961 Act from 1 April 2026, so old section numbers are no longer a safe guide. Check the current provision on incometax.gov.in. Do not choose a policy for the tax angle.