Term Insurance vs ULIP: What Makes More Sense

If you are thinking about financial stability, then it is better that you do not mix your investment and insurance together. There is no benefit putting all your money in a single financial product. With so many companies and so many products being offered, it is difficult to understand which plan we need and which plan suits us the best. Two of those options are ULIPS and Term Insurance. To understand ULIP vs Term Insurance better, it is necessary to understand both these financial products first.

Term Life Insurance

A term life insurance is death benefit plan. This is a simple policy that covers your family’s or your nominee’s financial security, in case of demise of policy holder. The cover will be provided till the end of the policy term that the policy holder has decided. The policy term could be for 20 years, 30 years, 45 years etc.

Policy holder can pay annual premiums for the entire term of policy. The term life insurance cover ends, the time policy holder stops paying premium. No money is paid at the end of the policy term. The entire amount being paid as premium every year will be added in covering death risk.

·       The policy holder decides the sum assured, and that is the amount received by their family in case of policy holder’s death. The sum assured needs to be 10 to 15 times your annual income plus any loan or debt if you have any.

·       As it is a death benefit plan, the insurance company pays the sum assured to the nominee, only if the policy holder dies. There is no maturity benefit, i.e. there will be no returns if the policy holder lives by the tenure of term plan.

·       Under section 80C tax deduction, the premium paid towards a term policy can save the tax. The sum assured received by the nominee is entirely tax-free.

Unit Linked Insurance Policy (ULIP)

It is a combination of insurance and investment plans. Under this plan, a part of premium is deducted as mortality charge of insurance and the rest of the amount is invested in different funds. Policy holder’s money can be invested in bonds, equities, debts, market funds, or a hybrid.

Term Life Plan Vs Unit Linked Insurance Policy (ULIP)

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 over ULIP

·      These are risk free and provide fixed returns in case of demise of policy holder.

·      The premium component is low as compared to ULIP.

·      The sum assured or coverage offered is higher than ULIP.

·       It offers several add-on covers such as Critical Illness rider, Accidental Death benefit rider etc. these benefits enhance the basic term insurance cover.

·      There are no additional charges.

Conclusion-

Both term life insurance and ULIPs are for two different reasons; ULIP is an investment-cum-insurance plan, whereas Term Insurance is a protection plan. An investment plan will help you build a corpus for your future retirement. ULIP satisfy your future needs, whereas Term Insurance is to financial protection to your family in your absence and secure their future.