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.