ULIP vs. Term Insurance – The Big Debate

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‘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 have their 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. While others suggest that for those looking for a policy that can act as both investment and insurance, ULIP can be a fitting solution.

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 one of the highlights of ULIPs. In lay man’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

Ideal time to consider purchasing

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

Ideal time to buy

You can buy it anytime based on your requirements and your savings

Between the age 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 Return of Premium Plan, you can’t avail maturity benefits

Tax-savings

Deduction under Section 80 (C)

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.

Depends on the person buying the plan. Preferably one must have a term insurance cover for as long as he has dependent family members.

 

Our take:

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.