What is a Unit Linked Insurance Plan (ULIP)?
A Unit Linked Insurance Plan (ULIP) is an investment plan which also includes a mandatory component of insurance. Your annual premium is divided into two portions, one of which is set aside as life cover to financially secure your family while the remaining is invested into the market through various funds of your choice. A ULIP has a mandatory lock-in period of 5 years and allows for high flexibility through the facility of fund switching.
Benefits of ULIP
- ULIP offers both life insurance and market-linked investment in a single plan.
- Investment returns depend on equity, debt, or hybrid funds chosen by the policyholder.
- Tax deduction on premiums is available under Section 80C, up to ₹1.5 lakh per year under the old tax regime.
- Maturity benefits are tax-free under Section 10(10D) if the annual premium is within ₹2.5 lakh as per current rules.
- Fund switching flexibility allows investors to adjust their portfolio based on market conditions for better long-term growth.
What is a Term Insurance Plan?
A term insurance is a pure form of life insurance which aims at providing life cover for a specific period of time as and when chosen by the policyholder. It does not have any additional investment component and is only designed for protection without any added wealth creation facilities.
Benefits of Term Insurance
- Term insurance provides strong financial protection to the family at a low cost.
- Dependents receive financial support to manage expenses, loans, and liabilities in case of the policyholder’s death.
- The plan is simple, making it easy to understand and manage.
- A high life cover is available at a very affordable premium compared to other insurance products.
- Leading insurers in India maintain high claim settlement ratios, which improves trust and reliability.
ULIP vs Term Insurance: Taxation
Taxation is an important factor which can help you save on your premiums or eat away at your benefits. The following table lists the tax implications on both ULIP and term insurance.
| Parameter |
ULIP |
Term Insurance |
| Deductions on premiums |
The premiums are eligible for deductions under section 80C as per the old tax regime. |
The premiums are eligible for deductions under section 80C as per the old tax regime. |
| Death benefit payout |
Death benefit is paid to the nominee completely free of tax. |
Death benefit is free of tax. |
| Maturity/ survival proceeds |
Tax-free if your annual premium remains below ₹2.5 lakh per annum. If the annual premium exceeds the aforementioned limit, the proceeds are taxed at 12.5% LTCG. |
A standard term insurance does not have any maturity benefits. However, if your payouts are received under a return of premium plan, then your maturity is completely tax-free. |
Strategy to Invest Between Term Plan and ULIP Plan
To create a solid foundation for you and your family, you can do your investments as per the following suggested strategy:
- Start with Term Insurance for solid family protection at a low cost, say ₹15,000 yearly for ₹1 crore cover.
- Allocate the remaining budget, perhaps ₹50,000, to a carefully chosen ULIP with low charges, equity-heavy funds, and flexible switching.
- The term handles pure risk cheaply. ULIP grows wealth through markets, averaging 10-12% returns after the initial lock-in.
- You can customise ULIP to fit your risk profile. For steady growth, put your money in a prudent debt fund. For large returns, put your money in an aggressive equities fund.
Conclusion
If you want to protect your family, have dependents, or get the most coverage for the least amount of money, choose Term Insurance as your basis. If you want insurance and market-linked growth, add a well-designed ULIP to the investment part. This mix offers full protection and increased possible profits for most consumers.
