Every Indian family has that one relative. You know the one. Shows up at Diwali, accepts a kaju katli, and then says, "Beta, ek policy le lo. Paisa bhi wapas milega." Before you sign anything, let's figure out what that "policy" actually is, because "insurance" in India usually means one of two very different things.
First, what is life insurance for?
Life insurance has exactly one job: if you die, your family gets money so their life doesn't fall apart. Rent, school fees, the home loan EMI, groceries. That's it. It's not meant to make you rich. It's meant to stop your family from becoming poor.
Keep that one idea in your head. Everything else in this post flows from it.
What is term insurance?
Term insurance is pure protection. You pay a yearly premium for a fixed period (the "term", say 30 years). If you die during that period, your family gets the full cover amount (the "sum assured"). If you survive the term, you get nothing back.
"Nothing back? Then what's the point?" That's the most common reaction, and it's a bit like asking why you paid for a helmet when you never crashed. The point was protection, and you had it every single day.
Because there's no savings part, term insurance is cheap for the cover you get. A healthy 30-year-old non-smoker can often get ₹1 crore of cover for a premium in the range of a nice phone every year. (Actual premiums depend on your age, health, habits and insurer, so compare real quotes.)
What is an endowment plan?
An endowment plan is insurance plus savings in one box. You pay a premium every year. If you die during the term, your family gets the sum assured (plus any bonuses). If you survive, you get a lump sum at maturity.
Sounds like a win-win, right? Here's the catch. Most of your premium goes into the savings part, so the actual cover is small, and the savings part usually grows slowly. You end up with a policy that's a little bit of insurance and a little bit of investment, and not great at either. It's the "combo meal" where the burger is small and the fries are cold.
Fintelligent
The same ₹1 lakh, two ways
Say you can set aside ₹1 lakh a year for 20 years. Here are two options. (All rates below are assumptions for illustration, not quotes or guaranteed returns.)
Option A: Endowment plan. ₹1 lakh a year buys you a sum assured of about ₹10 lakh. Assume the policy works out to roughly 5.5% a year. After 20 years, you get about ₹36.8 lakh.
Option B: Term plan + invest the rest. Spend an assumed ₹12,000 a year on a ₹1 crore term plan. Invest the remaining ₹88,000 a year somewhere sensible. At an assumed 7% a year, that grows to about ₹38.6 lakh in 20 years.
| Endowment plan | Term plan + investing | |
|---|---|---|
| Yearly outgo | ₹1,00,000 | ₹12,000 + ₹88,000 |
| Cover if you die | About ₹10 lakh | ₹1 crore |
| Money after 20 years (assumed) | About ₹36.8 lakh | About ₹38.6 lakh |
| Flexibility | Locked in; early exit costs you | Investments can be changed or paused |
Assumption: each yearly payment is made at the start of the year, so every rupee gets a full year of growth before the next one goes in.
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Look at the "cover" row again. Ten times the protection for your family, and you still likely end up with a similar or bigger pot. That's why most financial planners say: buy term, invest the rest.
How much cover do you need?
A common rule of thumb is 10 to 15 times your yearly income, plus any big loans. Earning ₹6 lakh a year with a ₹20 lakh home loan? Something like ₹80 lakh to ₹1.1 crore of cover is a reasonable starting point. Your exact number depends on your family's expenses and goals, so treat this as a ballpark, not a rule.
What about taxes?
A few rules worth knowing (checked October 2026):
- No GST on individual policies. From 22 September 2025, the GST on individual life insurance premiums (term and endowment alike) dropped from 18% to zero. Group policies from your employer still carry 18% GST.
- Premium deduction (old regime only). Under the new Income-tax Act, in force from 1 April 2026, the old Section 80C is now Section 123. You can deduct life insurance premiums within the overall ₹1.5 lakh limit, but only if you've chosen the old tax regime. The new regime, which is the default, gives no deduction. For policies issued from 1 April 2012, only premium up to 10% of the sum assured counts.
- Maturity money isn't automatically tax-free. The old Section 10(10D) exemption now sits in Section 11 with Schedule II. For non-ULIP policies issued on or after 1 April 2023, if your total yearly premium across such policies goes above ₹5 lakh, the maturity amount becomes taxable. For the exemption, the yearly premium must also stay within 10% of the sum assured (15% for certain special policies, such as those covering a person with a disability or a specified disease). Our example's ₹1 lakh premium on ₹10 lakh cover sits exactly at that 10% limit. Money paid to your family on your death stays tax-free.
So if an agent says "fully tax-free, guaranteed," ask them which rule they mean.
When might an endowment plan make sense?
To be fair, endowment plans aren't evil. They can suit someone who:
- really, truly can't save unless they're forced to,
- wants a guaranteed amount and is fine with low returns, or
- already has enough term cover and wants a very conservative add-on.
For most young earners with dependants, though, term insurance comes first. And if you're worried insurers don't actually pay up: in 2024-25, life insurers settled 97.82% of individual death claims by number and 96.29% by amount, as per IRDAI's Annual Report.
Already stuck in an endowment plan?
Don't panic and don't surrender in a hurry. A few things to know:
- Free-look period: If you just bought one, IRDAI rules give you 30 days from getting the policy document to cancel it and get your premium back (minus small deductions for the cover you had, medical tests and stamp duty).
- Surrender value: Under IRDAI's 2024 rules, most non-linked savings policies now pay a surrender value once you've completed the first policy year and paid one full year's premium. Exiting early still usually means taking a loss, so compare the surrender value with what you'd get if you just stopped paying and kept it as a "paid-up" policy.
- Get term cover first. Whatever you decide about the old policy, make sure your family is protected with enough term cover before you exit.
The bottom line
Insurance is for protection. Investing is for growth. When you mix the two, you usually get less of both. Buy enough term cover to keep your family safe, then build wealth separately with things like SIPs, PPF or EPF. And the next time a relative offers you a policy with your kaju katli, smile, say thank you, and ask, "Cover kitna hai?"
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Sources (checked 13 October 2026): CBIC, Notification No. 16/2025-Central Tax (Rate) (17 Sep 2025, effective 22 Sep 2025), as explained in Department of Financial Services, FAQs on GST exemption for individual life and health insurance; Income Tax Department, Schedule XV, Income-tax Act, 2025 (premium deduction under Section 123, ₹1.5 lakh limit, in force 1 Apr 2026); India Code, Section 123, Income-tax Act, 2025; Income Tax Department, Income-tax Act, 2025 (as amended), Schedule II (maturity exemption conditions incl. 10%/15% premium-to-sum-assured ratio and ₹5 lakh limit, formerly Section 10(10D)); CBDT, Circular No. 15 of 2023, 16 Aug 2023 (copy; ₹5 lakh premium rule); IRDAI, Master Circular on Life Insurance Products, 2024 (surrender value); IRDAI, Annual Report 2024-25, Table I.11 (individual death claims settled); IRDAI, Master Circular on Protection of Policyholders' Interests, 2024 (30-day free-look period). Example premiums and returns are assumptions for illustration only.
