ULIP vs Term Insurance

‘Never mix investments with insurance.’ Most of us have heard this advice. Even more of us swear by it. While we know that insurance products havetheir pros and cons, what every potential buyer agonises over is making the right choice among these products. And, with choices come details; with details come debates. One such debate is between Term Insurance and ULIPs. Some experts, through their newspaper columns and blogs, generally recommend Term Insurance Plans. While others suggest that for those looking for a policy that can act as both investment and insurance, ULIP can be a fitting solution.  

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While both have their ups and downs, Term Insurance is being backed by every investment guru. But, is it wise to put all your eggs in one basket?

To make a sound investment, it is essential to analyse every aspect of a plan with a fine-toothed comb. To make the choice easier for you, here is a comparison of Term Insurance and ULIPs. Hopefully, it will make sense of the conflicting opinions.

ULIPs or Unit Linked Insurance Policy: Are they as appealing as they seem to be?

A ULIP or Unit Linked Insurance Plan is a combination of both insurance and investments. In ULIPs, one part of the premium is paid towards the insurance and is called a mortality charge, while the other part is invested in different investment options like market funds, bonds, debts, equities, or a hybrid. The selection of funds is at your discretion.

On paper, ULIPs are often considered as one of those plans that are too good to be true. Investment flexibility and fund switching are some of the highlights of ULIPs. In layman’s terms, it means that you can choose the funds you want to invest in and can switch between any of the options mentioned above. The transfer of accumulated funds is smooth and does not lead to any tax ramifications.

However, the number of free switches is limited and varies from insurer to insurer. Since the purpose of ULIPs is to invest and insure, you also need to pay additional charges like policy mortality charges, administration charges, fund management charges, etc.

Term Insurance: What Makes it Enticing? 

Term Insurance is a pure death benefit plan. In simple words, it assures your family’s financial security, in case of your death. More or less, it serves as an income replacement instrument at your untimely death at an affordable premium. Though it has no investment component, it covers your nominee for the duration of the policy without any changes in the premium. Also, the offered benefit can be enhanced by clubbing the basic policy with notable add-ons such as Waiver of premium, Critical Illness Rider, Accidental Death benefit, Return of Premium, etc.

The policy duration can be between 5 and 40 years, and if you are not able to pay the premium due to any reason whatsoever, your cover will cease. You will not be entitled to any benefit in that case. Therefore, it is important to pick a plan that you can afford in the long run as the premium is constant throughout the policy tenure.

ULIPs vs.Term Insurance:

Parameters ULIP Term Insurance
Type  Insurance + Investment Insurance
Ideal For Anyone looking to invest in the long-term The family in the breadwinner’s absence
Investment  Partly invested in different funds No investments
Insurance Partly invested as a premium for an insurance Pure Insurance
Returns (if any) Returns depend on the volume of allocated money as well as market performance No returns Death Benefit only
Cost-Effectiveness  ULIP has multiple charges related to it, so the rates of premium can be significantly higher than the term insurance plan.   The premium amount for term insurance plans is comparatively lower in the market 
When to Buy?  When you want insurance and higher returns in the long-term When you wish to protect your loved ones against certain mishaps and secure their future financially
Charges Many charges – agent fees, fund switching charges, policy administration charges, fund management fee, funds allocating charges No charges
The ideal time to buy You can buy it anytime based on your requirements and your savings Between the ages 25 to 35 years
Lock-in Period At least – 3 years to 5 years No Lock-in period (You have to get it renewed every year)
Security  Not Secure Highly Secure
Maturity Benefits One can redeem units at the prevailing unit prices Until you opt for the Return of Premium Plan, you can’t avail maturity benefits
Tax-savings All the payouts which are received are exempted from taxes u/s 10D of the Income Tax Act, 1961. Moreover, tax rebates are also applicable for premium paid u/s 80C  Deduction under Section 80 (C). The Claim Benefit to be paid to the nominee would also be tax-free under section 10(10D)
Switching Options Switching allowed between the funds linked in the plan and also to change the risk-return No switching option
Tenure Depends on the investor, but for good returns on investment – a term of 10 to 15 years is recommended. Also, depends on the performance of the market of funds one is invested in.  Depends on the person buying the plan and the term was chosen by him/her. Preferably one must have a term insurance cover for as long as he/she has dependent family members.
Returns  Depending on the fund’s market performance you have invested into  Death benefits in case of an unfortunate demise of the policyholder. If the policyholder has the cover of return of premium, then the insurer will repay the paid premiums as a maturity benefit if he/she survives the policy term. 

 Disclaimer: Policybazaar does not endorse, rate or recommend any particular insurer or insurance product offered by an insurer

*All savings are provided by the insurer as per the IRDAI approved insurance plan. Standard T&C Apply

Who is the Winner? – Term Insurance or ULIPs 

Term plans are free-of-risk policies that help secure the future of your family in case of an unfortunate event. They are majorly useful if you are looking out for a plan with low premium rates with a high sum assured. In ULIPs, investment opportunities are offered along with the life coverage amount. Unlike term plans, you can receive a maturity benefit and fulfill long tenure financial goals. Both plans serve different purposes and thus, you should choose as per your requirements. Adding both to your financial cart will help you secure the family’s financial future and also build a corpus for your twilight years and other related future requirements. 

Wrapping It Up!

By now, you know that comparing Term Insurance and ULIPs is like comparing chalk and cheese. Though both are insurance products, they serve different purposes. Term insurance financially protects your family in case of your untimely death, while the premium paid in ULIPs is divided into two components, one of which is fixed as insurance while the other is invested in various funds. A ULIP aims to secure your financial future with investment, while Term Insurance secures your family when you aren’t around.

As their purposes, as well as benefits, are different, it is unwise to measure them by the same tape. If you are still confused between ULIP and Term Insurance, choose the one that matches your priorities and financial goals.

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