Term Life Insurance vs ULIP

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With so many companies, offering different types of insurance products, it becomes difficult to select one, two of these products are ULIPs (Unit Linked Insurance Plans) and term life insurances. In this article, we aim to clarify all the doubts surrounded around choosing one of these two.

What is a ULIP?

It is essentially a combination of insurance and an investment vehicle. A portion of the premium paid by the policyholder is utilized to provide insurance coverage to the policyholder and the remaining portion is invested in equity and debt instruments. The aggregate premiums collected by the insurance company providing such plans are pooled and invested in varying proportions of debt and equity securities in a similar manner to mutual funds.
Each policyholder has the option to select a personalized investment mix (debt and equity) based on his/her investment needs and risk appetite. Like mutual funds, each policyholder’s Unit-Linked Insurance Plan holds a certain number of fund units, each of which has a net asset value (NAV) that is declared on a daily basis. In case of the policy holder’s death during the policy term, the sum assured or the fund value (based on the NAV), whichever is higher is paid. The ULIP also offers you a partial withdrawal option of the fund value. You can read about the terms and conditions attached to the withdrawal here.

What is a Term Life Insurance Plan?

A term life insurance is a simple plan that provides financial security to your family or nominee in case of your death. The coverage is available till the end of the policy term. You have to pay premiums every year for the entire term of the policy. When you stop paying the insurance premium, your insurance cover ends and you don’t get anything at the end of policy term. There is no maturity benefit i.e. you don’t get anything if you outlive the policy term. In case of your death, during the policy term, sum assured is paid to your nominee.
So, a term life insurance is a pure insurance plan and does not have any investment component.

Differences between the two:

BASIS
Term Life Insurance
ULIP
Fund Type
Insurance
Insurance + Investment
Tax Saving
Premium paid is deductible under Sec 80(C). Sum Assured paid to the nominee is also tax free under sec 10 10(D)
Deduction under Sec 80(C)
Returns
No returns, since no investment. Only the sum assured is paid out on the death of the policy holder.
Depend on if the ULIP is equity centered or debt centered or hybrid.
Charges
No charges, except the premium charges
Lot many charges like fund allocation charges, fund management charges, fund switching charges and agent fee
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.
It is believed that for good returns on investment you should ideally invest for 10 to 15 years.
Lock-in Period
No lock-in period. Has to be renewed every year.
Lock-in period of 3 or 5 years
Maturity Benefits
No maturity benefits is there as term insurance only covers the risk of premature death.
Units of the fund can be redeemed at the present NAV at the time of maturity.

When to buy Term Life Insurance Plan?

Term Life Insurance should be bought when your goal is the financial security of your family/dependents. The premium paid in the term life insurance policy is always lower than the premium paid in a ULIP and the sum assured is also higher than that of a ULIP. Also, term insurance provides locked premium. Example- If your annual premium is Rs. 10,000 when you buy the policy, it will remain the same till the end of the policy term.

When to buy Unit Linked Insurance Plan?

When your main aim is investment rather than financial security of your family, you should go in for a ULIP. Whether it is for retirement or education, if a ULIP is availed till maturity, it is beneficial.  It gives you the dual benefit of savings and protection, all in a single plan. But, even if you buy a ULIP, you should go in for a term insurance as the cover amount is very low in a ULIP as compared to that of a term insurance.

Conclusion

ULIP works like a combination of term insurance and mutual funds. It might be a better option to purchase a term insurance and mutual funds separately than going for a hybrid instrument like ULIP. Since both, insurance and mutual fund markets are very competitive these days, this will give the investor the flexibility of choosing the best insurance plan with adequate risk cover and the mutual fund that offers the best return without getting stuck in a combined scheme where some or the other benefits have to be compromised.
For any queries on the above topic, feel free to write to us on mailinvestxp@gmail.com.
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Author:
Akanksha Goel | LinkedIn