Term Insurance vs ULIP: What To Choose ?

Understanding Term Insurance and ULIP

Before we dive into the differences between term insurance and ULIP, let's first understand what these terms mean.

Term Insurance Meaning

Term insurance is a kind of life insurance that offers protection for a predetermined time frame. In case of the policyholder's death during the term, the insurance company pays a death benefit to the nominee. There is no payoff if the policyholder lives out the term. Term insurance is a pure protection plan and does not offer any investment benefits.

ULIP Meaning

Unit Linked Insurance Plan (ULIP) is a type of life insurance that combines insurance and investment. A part of the premium paid towards ULIP goes towards providing life cover, and the remaining amount is invested in various market-linked funds. ULIPs offer the potential for higher returns but also come with higher risks.

Difference Between Term Plan and ULIP

Now that we understand the basic definitions of term insurance and ULIP, let's look at the key differences between the two.

Purpose

The primary purpose of term insurance is to provide financial protection to the policyholder's family in case of their untimely death. On the other hand, ULIPs offer both insurance and investment benefits. They provide life cover and also allow the policyholder to invest in various market-linked funds.

Premiums

Term insurance premiums are generally lower compared to ULIP premiums. This is because term insurance only provides life cover and does not offer any investment benefits. ULIP premiums are higher as a part of the premium goes towards providing life cover, and the remaining amount is invested in market-linked funds.

Maturity Benefit

Term insurance does not offer any maturity benefit as it is a pure protection plan. No payout occurs if the insured lives out the period. On the other hand, ULIPs offer a maturity benefit in the form of the fund value at the end of the policy term. The total amount invested in market-linked funds is known as the fund value.

Flexibility

Term insurance offers limited flexibility as it is a pure protection plan. The policyholder cannot change the sum assured or the policy term once the policy is purchased. ULIPs, on the other hand, offer more flexibility. The policyholder can switch between different market-linked funds, change the sum assured, and even increase or decrease the premium amount.

Tax Benefits

Both term insurance and ULIPs offer tax benefits under Section 80C of the Income Tax Act. The premiums paid towards term insurance are eligible for tax deductions up to Rs. 1.5 lakhs, and the death benefit received by the nominee is tax-free. In ULIPs, the premiums paid are eligible for tax deductions, and the maturity benefit is also tax-free.

Surrender Value

Term insurance does not offer any surrender value as it is a pure protection plan. If the policyholder stops paying the premiums, the policy will lapse, and there will be no payout. ULIPs, on the other hand, offer a surrender value if the policyholder decides to discontinue the policy before the end of the policy term. The surrender value is the fund value at the time of surrender, minus any applicable charges.

Which One Should You Choose?

Now that we have looked at the differences between term insurance and ULIP, the question arises, which one should you choose? The answer to this question depends on your financial goals and needs. If you are looking for pure protection and do not want to mix insurance with investment, term insurance is the right choice for you. It offers a high life cover at an affordable premium and provides financial security to your family in case of your untimely death. On the other hand, if you are looking for both insurance and investment benefits, ULIP is the right choice for you. It offers the potential for higher returns and also provides life cover. However, it is essential to note that ULIPs come with higher risks, and the returns are not guaranteed.

Takeaways

• Term insurance is a pure protection plan, while ULIP offers both insurance and investment benefits.
• Term insurance premiums are lower compared to ULIP premiums.
• Term insurance does not offer any maturity benefit, while ULIPs offer a maturity benefit in the form of the fund value.
• ULIPs offer more flexibility compared to term insurance.
• Both term insurance and ULIPs offer tax benefits under Section 80C of the Income Tax Act.
• Term insurance does not offer any surrender value, while ULIPs offer a surrender value if the policy is discontinued before the end of the policy term.
• The choice between term insurance and ULIP depends on an individual's financial goals and needs.