Read on to know the core differences between two plans that every financial planner will recommend: Term Life Insurance and ULIPs.
Most financial gurus will tell you,
If you are thinking to provide right kind of financial stability to your family, then you must learn not to mix investment and insurance in your financial portfolio. Do not put all your eggs in one basket.
With so many insurance companies offering different types of products, sometimes it becomes difficult to understand which plan we need to buy. Two of those product options are ULIPs and Term Insurance.
So if you too are trying hard to make sense of the two products and which you must buy, read on to know more.
What are Term Insurance and ULIPs?
Completely new to the concepts of term insurance and ULIPs? This short section will help you understand.
Term Life insurance
A term life insurance policy is a simple plan that covers your family’s or your nominee’s financial security, in case of your death. This coverage is available till the end of the policy term that you choose: 20 years, 30 years, 45 years, etc.
You pay annual premiums for the entire term of the policy. The year you stop paying premium for whatever reason, your term life insurance cover ends. There’s no money paid at the end of the policy term.
So, a term life insurance is a pure death benefit plan. It is a pure insurance plan with no investment component. All of the amount that you pay as premium every year will go in covering one risk, i.e. death.
- You as policyholder decide the sum assured, which is the amount your family would receive in case of your death. Normally, the sum assured should be 10 to 15 times your annual income + any loan or debts you might have.
- Since it is a pure death benefit plan, the insurance company pays sum assured to your nominee, only in the event of death. There is no maturity benefit; that means there are no returns if the insured person outlives the tenure of term plan.
- If you are looking to save tax, the premium paid toward a term insurance policy is can be counted under section 80c tax deductions. The sum assured that your nominee would receive is also entirely tax-free.
ULIPs or Unit Linked Insurance Policy
ULIPs are a combination of insurance and investment plans. In ULIP, a part of the premium is deducted as mortality charges, i.e. insurance, and the other part of the premium is invested in different funds. The funds where your money could be invested are bonds, equities, debts, market funds, or a hybrid, depending on the investor. So theoretically, a ULIP seems nothing less than a great plan, since it provides both investment and insurance. But should you depend on just that? Let’s find out.
Factors Where ULIP Has an Upper Hand
Investment Flexibility: ULIPs gives you the flexibility to invest your money as per your risk profile, convenience and financial commitments. You have the option to invest either in equity, debt or in hybrid funds.
Fund Switching: A policyholder gets the option of selecting the fund where they’d like to invest their money. They can transfer or switch the accumulated amount among any of the 6 to 8 funds available.
There are no tax implications if you switch between funds where you’d like your ULIP money to be invested.
However, there are only a fixed number of free switches available, which will depend on one insurer to another. You would have to pay a nominal fee every time you’d like to switch the investments.
Factors Where Term Insurance Has an Upper Hand
Death BenefitTerm life insurance provides your family the assurance of coverage against the biggest possible risk, i.e. death. In that sense they are a smart investment to safeguard your family’s financial position, in case of your demise.
Low PremiumsTerm plans are considered to be the cheapest form of life insurance with no frills attached. The simple product assures you peace of mind for your family. The sum assured is certainly higher as compared to the amount paid through premiums. Riders are available to enhance coverage, but they attract slightly higher premium.
Locked PremiumOnce you buy a term insurance plan, you freeze the premium for the rest of the policy tenure. So buying a Rs. 50 lakh term cover at the age of 30 for Rs. 386 monthly premium implies that you’d have to pay the same amount till end of the policy term. So, the earlier you buy a term plan, the more profitable it proves to be in the long run.
Difference between Term Life Plans and ULIPs
|Point of Comparison||Term Insurance||ULIP|
|Type of product||Insurance||Insurance + Investment|
|Tax-savings||Deduction under Section 80 (C) is available. The sum assured paid to your nominee would also be tax-free under section 10(10D)||Deduction under Section 80 (C)|
|Investment||No investment part||Partly invested in debts, bonds, equity, etc|
|Insurance||Pure Insurance||Only part of the premiums in insurance (mortality charges)|
|Returns||No investment part = no returns However, the sum assured is paid out on the death of the policyholder||Moderate returns. Depends on the allocated funds and market performance|
|When to consider buying||When you want protection and higher returns in long term||When you want to protect your family against mishaps and financially secure their future.|
|Charges||No charges except the premium payment||Many charges – funds allocating charges, fund management fee, policy administration fee, fund switching charges and agent fees|
|Tenure||Depends on the person while buying the plan. Ideally one should have a term cover until the age one would have family members dependent on them.||Depends on the investor but for good returns on investment – 10 to 15 years.|
|Ideal Term||Long Term||Long Term|
|Ideal Time to buy||Between the age 25 to 35 years||Can be bought anytime depending on the requirement and amount saved|
|Switching Options||No switching option||Switching allowed between the funds linked in the plan and also to change the risk return.|
|Lock-in Period||No Lock-in period (Needs to be renewed yearly)||Minimum – 3 years to 5 years|
|Security||Highly Secure||Not Secure|
|Maturity Benefits||No maturity benefits unless opted for Return of Premium Plan||One can redeem units at the prevailing unit prices|
Reasons to Choose Term Insurance
- Term Insurance plans are considered to be risk-free and provide death benefit to your loved ones in case of your death.
- The premium component in a Term Insurance is quite low as compared to any life insurance plans
- The sum assured or coverage offered by term insurance plan is comparatively far higher than any other life insurance plan.
Reasons to Choose ULIP
- ULIP provides investment opportunity along with a life cover to the life assured.
- ULIP provides Maturity Benefit.
- Opt ULIP only if you are planning a long-term investment. ULIP is a long-term investment scheme that helps you fulfil your life goals and future needs, wherein you need to stay invested at least with a horizon of 10 years.
What we recommend
By now you must have realised that both term life insurance and ULIPs are meant to solve two different purposes. Where, ULIP is an investment-cum-insurance plan, a term insurance is a pure protection plan.
Thus, it would not be right to compare two products of different caliber, as their purpose is different.
We normally go for investment plans to build a corpus for our future requirement or for our retirements. ULIP is one such product, which helps you fulfil your future needs. Whereas, the basic purpose of a Term Plan is to protect your loved ones when you are no longer around. It helps to provide your family a financial protection and secure their future.