ULIPs are similar to mutual funds except that they provide life cover, tax benefits and need to be kept for long term. On the other hand, term insurance is actually insurance where your dependents get sum insured in case you die, but nothing if you outlive the insurance term. Both term plan and ULIP do have their benefits and drawbacks. Read on to know more.
Looking for a suitable insurance to meet your insurance cover? Confused by the differing opinions of financial advisors whether ULIPs are better than term insurance or vice versa? Want to know how to choose between the two? Then read on to know how to go about it in order to get the best insurance for your needs.
Features of term insurance vis-à-vis ULIP
| Term Insurance | ULIP | |
| Investment component | Nil | Present |
| Maturity Value | Nil | Value of the corpus invested in different assets like stocks, bonds and cash |
| Charges | Not declared by the insurer | Declared by the insurer |
| Insurance term | Short term | Long term, with the compulsion to pay premium for at least 3 years |
| Premium | Decided on the basis of age and health condition | Decided on the basis of your payment capacity |
| Insurance cover | Very high | Nominal |
| Suitable for | Those having dependents or have liabilities like home loan | Those looking to avail of investments along with life cover and tax benefits |
| Performance issues | Not Applicable | Need to be considered as the charges, and performance of funds of different insurers varies significantly. |
| Premium charged | Lowest | Highest as part of the premium goes towards investment |
So from above, you can safely conclude that ULIPs are similar to mutual funds except that they provide life cover, tax benefits and need to be kept for long term. On the other hand, term insurance is actually insurance where your dependents get sum insured in case you die, but nothing if you outlive the insurance term.
Pros and cons of term plan and ULIP
Both term plan and ULIP do have their benefits and drawbacks. Here are some of them.
Term plan: Pros:
- Highest sum assured
- Lowest premium charged
- Can be stopped at the end of premium term, as the life cover exists only for the year for which premium is paid.
- Simple to understand.
Cons:
- No maturity value as there is no investment component.
- Available only up to 50 years age and the life cover will continue only till 65 years. Also those insurers who offer insurance cover to seniors end up charging very high premium.
- No provision to increase the premium with the increase in income.
ULIPS: Pros:
- You get returns when the policy matures
- Can increase the premium as per increase in your income.
- Flexibility of investing across various asset classes, thereby helping you maximize returns.
- Long-term investment, helping you inculcate value of savings
Cons:
- Very high charges
- Nominal insurance cover
- Difficult to compare amongst ULIPs from other insurers due to non-standard charges, asset allocation etc.
- Inability to pay the premium will lead to lapse in policy. Also despite many insurers telling you that paying premium for 3 years is enough, remember mortality charges will be deducted from the corpus invested. If the value of the corpus is lesser than the mortality charges due to erosion in the value of the underlying asset, your life cover will stop. Your policy will lapse and you will have to take a fresh policy.
How to decide whether to opt for term insurance or ULIP?
If you need to decide which one to choose, answer these questions:
- Do you have dependents?
- Do you have a liability like a home loan?
- Are you young and want cheap insurance with high life cover?
If you have answered yes to these questions, then term plan is must for you.
On the other hand if you answer yes to these questions, then opt for ULIP.
- Can you afford to pay high premiums till the end of policy term?
- Are you looking for an investment option along with insurance and tax benefits?
- Are you saving towards a particular goal?
Additional Reading: A checklist on charges involved in ULIPS
Both term plan and ULIP have their pros and cons. Which one is suitable for you will be decided by your personal circumstances. Always take them into account before choosing the right one for you.
I have invested in HDFC and paid three instalments and Nov is no where to the amounted invested . ULIP is not even covering the insurance .While taking policy they had assured me that this is the best yielding investment .
could you suggest and comment .
Dear investment performance of the ulip starts only after 3rd year since initial cost of the policy will be higher. so before investing in ulip u need know whether that policy suits you or not. every policy in the market is good but you or your advisor has to decide which one is good for you.
ULIPS are worst, do not invest in them. Invest in LIC for life insurance and if you want to increase your wealth : balance you investment between FDs, Mutual funds and Shares. Take care
Dear Vinod
As per my knowledge When u take ulips for ur self then u should compare with different plans which are available in the market according to ur need of insurance & investment. Now a days we have plans in which we can take maximum insurance in cheap rates & gurantted capital also.
According to you every one should invest in LIC not in private companies but where LIC also invest in market in their ULIPS so why should someone go there.
That was before the recession. During recession how can you expect returns.
Dear, Normaly ulip investment are for long term not for the short term. and most of the policy performance starts only after 3rd year. and more imptly every policy in the market is good policy but you or your advisor has to decide which one is suitable for you.
Dear All,
One fundamental problem of advocates of ULIP is they don't explain the basic purpose of insurance. Insurance is to cover the risk i.e in case of my death my family should get enogh money to meet the necessary expenses for living.
Here come the question to assess how much insurance cover is sufficient to meet the future expenses. If my annual household expenses is 3 lacs I should have a policy of 40-50 lacs so that bank interest on which @ around 8 % wiil meet the required expenses.
Now to get the policy of 40-50 lacs by ULIP or any endowment policy the premium will be around Rs. 2,00,000. Whereas you can buy the same by paing only Rs. 20000 in any term policy.
Now if I don't have 2,00,000 to spent I can olny spent Rs. 20,000 per annum to get adequate insurance cover and if I have 2,00,000 then rest 1,80,000 I can invest in different products like PPF/Mutual Fund/Fixed Deposits/Equity shares.
But we should not mix insurance with investments and in case of term policy should not think about return on maturity as we don't think while paying premium for Mediclaim policies.
Thanks and Regards,
CA Sanjay Mukherjee
I fully agree with Mr. Sanjay Mukherjee. Only one thing that the companies should be more transparent to give details of their products to its to be clients
Ashish Dutta Chowdhury
a senior citizen
After going thru all the discussion as i read above , I still have the opinion that ULIP may not be a right choice for everyone , but it still serve some purpose, for e.g. where a simple man wants to invest a amount suppose Rs. 10,000/-and wants to pay regular premium for 10 yrs. with a view to get some income alongwith having insurance cover in the same & also tax benefit, then i dont think he is thinking wrong, supposing market performs good in the next 10 yrs.
if you pay 20000 for term policy every year you do not get any return from it.term policy will give sum assured only when you die(whats the use of money when you die).now if you start from this year and you stay alive for 10 year you pay more than 2,00,000
more coz your premium will increase as you grow old.
now if you expect that you will be alive for more than 10 years then whats harm in having sumthing that will give you something extra. along with all that a term policy provide.
the basic problem with the ulip is people do not know all the charges and detail of the policy, in that case i would say that its your money so you should take extra care whenever you are putting in your hard earned money.
i would say if you are taking a long term view then ulips are better then term policy.make sure that you know the policy in and out
good article, huge learning
usefull articals to present in front of customer