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ULIP vs. Term Insurance – The Big Debate

Insurance, investment and saving for emergencies are three main elements of any sound financial plan. Mixing these elements is usually not advisable. However, there are insurance products that provide pure protection and some have an investment component attached. Keeping in mind the fact that every financial product has its own pros and cons, it becomes imperative for investors to debate on products they consider for buying to get more clarity on thoughts. ULIP vs. term insurance is one such main debate. Knowing each product in detail, its pros and cons and comparison with each other can give a better idea to take sound financial decision.

ULIPs or Unit Linked Insurance Policy

Unit linked insurance policy is an integrated product offered by insurance companies to provide dual advantage of insurance and investment. In this, a small amount of premium goes towards insurance coverage and the rest of the premium is invested in various fund options available (debt, money market or equity-oriented funds) as chosen by you. Fund value will be paid as maturity benefits. In case of death during the policy term, sum assured or fund value whichever is higher will be paid out to nominee. There are various ULIP products which are suitable for various investment objectives like wealth creation, children’s education or marriage and retirement etc. ULIP provides life cover along with benefit of wealth creation.

Term Insurance

Term insurance is the basic, pure and cheapest form of insurance that only provides comprehensive life protection. Term insurance provides highest coverage at low cost. In this, coverage is offered for a certain defined term. In case of death during the term, sum assured amount will be paid to the nominee. However, there will not be any benefit paid on maturity at the end of the policy term . But, there are term plans available in the market that are priced relatively higher to return back the premium paid at the end of maturity period. Term insurance is a pure insurance product that adequately secures your life.

ULIPs vs. Term Insurance

ULIPTerm Insurance
Insurance cum investment planPure insurance plan
Part of the premium is invested in different fundsPremiums are not invested
Suitable for long-term investors looking for insurance element along with itSuitable for everyone looking to secure family against future financial uncertainties
It is a market-linked investment. Hence, returns depend on the type of funds chosen for investment and prevailing market conditionsThere are only death benefits. No return of the premium paid.
ULIP is a hybrid product that involves multiple charges like premium allocation charges, mortality charges, policy administration charges, fund management charges, switching charges, premium redirection charges etc.Premium comprises of only mortality charges to provide life protection
ULIP comes in various types which can be chosen as per the investment need and goalIt is advisable to buy adequate coverage as early as possible to get complete protection.
ULIP product comes with five year lock-in period. There is no lock-in period. Premiums are to be paid to ensure the continued coverage for the defined term.
ULIP plans are suitable for 10 to 15 years term to get the potential return on investmentTerm should be chosen according to age. It’s wise to have cover till your family is financially dependent on you.

FAQs on ULIP vs Term Insurance

Can you cash in on a term life insurance policy?

No. term insurance provides only death benefits to the beneficiary in case of untimely demise of policyholder during the policy term. It does not have any cash value.

Do you get your money back at the end of a term life insurance?

No. In a basic term insurance policy, only sum assured is paid if the policyholder dies during the term of the policy. If the policyholder survives the policy term, nothing would be paid in return. However, there is a variant of term insurance called ‘return of premium term life insurance’ in which premiums paid for the term would be returned to policyholder at the end of the term, if he/she survives the term.

Is term or whole life insurance better?

Whether to buy term life insurance or whole life insurance, needs to be decided based on the financial need and goal. Term life insurance plan expires after a defined term. Whole life insurance plan provides coverage for entire life or till age 100. Unlike a term plan, a whole life plan comes with cash value accumulation. Making an informed choice is more important.

Is ULIP a good investment?

ULIP is one of the most tax-efficient long-term financial investment option. ULIP gives the triple advantage of life protection, wealth creation and tax-saving. A part of your premium money goes in towards life protection and the rest will be invested in various fund options to build wealth over long-run. Premium paid every year qualifies for tax deduction under Section 80C of the Income Tax Act, 1961. It also gives tax benefits under Section 10 (10D) for the maturity benefit and 80D for attaching health riders of the IT Act. With the multiple fund options available, ULIP is suitable for long-term investors of any risk profile.

Is ULIP tax free?

When it comes to investment, ULIP not only invests in equity, but also invests in debt and fixed income funds. Also, ULIP is an insurance plan and hence, the tax benefits are available on the same. Maturity proceeds from ULIP are tax free under Section 10(10D) of the IT Act, provided the premium paid is not more than 10% of sum assured. Similarly, sum assured or fund value paid to nominee on death of policy holder is also exempted from income tax under Section 10(10D) of the Income Tax Act. Premiums upto Rs. 1.5 lakh are eligible for tax deduction under section 80C of the Income Tax Act, 1961.

What is a universal life policy?

Universal life policy is an insurance product with cash value attached to it. Insurance and savings are the two components of universal life policy. It gives the policyholder flexibility to adjust premiums and death benefits.

What is the difference between term insurance and health insurance?

Term insurance safeguards your family’s future in your absence. It provides the highest life of coverage. Term insurance is generally bought for a longer term to secure loved one’s financial future. Term insurance benefits trigger only in the event of death of policyholder during the term. On the other hand, health insurance refers to securing yourself against health care emergencies. Health insurance policies are yearly renewable plans. Health insurance benefits can be claimed for hospitalisation cases.

What is permanent life insurance policy?

Permanent life insurance policy is similar to whole life plan that gives lifelong protection. It also has the ability to accumulate the cash value on tax-deferred basis.

What is the difference between mutual fund and ULIP?

Though both mutual fund and ULIP expose you to market risk, there is a huge difference in the structure and features of both the products. Mutual funds are pure investment products meant for medium to long-term investors. ULIPs are hybrid products that provides insurance cover and an investment option. ULIP comes with lock-in period of five years and hence, is suitable for long-term investors. Though both the products are professionally managed, charges on ULIP are more in comparison to mutual funds.

What is the difference between term and permanent life insurance?

Term life insurance is the simple, low-cost insurance that provides life cover for specified term without any maturity benefits. Permanent life insurance is much costlier than term plan as the coverage lasts for lifetime along with cash value benefits.

What is the difference between ULIP and ELSS?

Both ULIP and ELSS are functionally different tax-saving financial products. ULIP is a mix of insurance and investment that allows you to invest in various funds with diverse assets like debt, equity and fixed income. ULIP is a long-term product with five year lock-in period. On the other hand, ELSS is an equity oriented mutual fund that comes with three year lock in period. ULIP being the insurance product, is more tax efficient than ELSS. ULIP’s are not impacted by the long term capital gain tax.

What is the difference between ULIP and traditional plans?

ULIPs are market-linked insurance cum investment product. Hence, ULIPs have the potential to deliver higher returns based on the funds chosen and market conditions. Traditional insurance plans are considered to be risk-free as they invest majorly into government securities and other fixed investment securities. Traditional plans provide fixed returns as they are safe.

What is the difference between whole life insurance and universal life insurance?

Whole life insurance provides life-long protection with consistent premiums and offers guarantees cash value accumulations. Universal life insurance, on the other hand, provides flexibility to investors in the premium payment, savings element and death benefits of the policy.

Which life insurance is the best?

Life insurance is a crucial element to consider before starting any financial planning. With increasing competition and various innovative products available, buying the best insurance entirely depends on your individual financial requirement and investment goals.

Why should I invest in ULIP?

ULIP is one of the best financial product for you to achieve long-term goals. Here are few reasons for that:

  • ULIP provides both insurance and investment
  • ULIP offers various fund options to choose as per investment objective and risk appetite
  • ULIP is low-cost and flexible product
  • Income tax benefits in various ways.