ULIP Vs. Term Insurance - Which Way to Go?

‘Choose a life insurance plan with maximum benefits' - most of us have heard about this advice, and we believe in it too. Each of the insurance products has its unique features and benefits. It leads to a comparison between different types of life insurance policies, one of which is about ULIP and term insurance.

While some experts recommend buying term insurance for its core benefits, others suggest ULIP investment to get both an investment opportunity and life coverage. To make the right decision, you need to understand which of these plans are more suitable for you. To look at the premium side, you can use a term insurance or ULIP calculator online. But it is crucial that you analyze various aspects of these plans before making any decision.

Let' s compare what is ULIP and how it is different from term insuranceas per the following parameters:

1. Coverage Type

Term insurance is mostly known for the death benefits to the insured' s family after his untimely demise. More or less, it is a tool to replace the income of your family after you are not around to provide for them. It does not have any investment part and is thus, highly affordable. You can easily buy a term plan at a low premium based on your current age.

ULIPs, on the other hand, work a little differently than a term plan. It gives you an option to invest money in different market-linked funds, along with providing life insurance coverage. You can use a ULIP calculator to see how the premium varies with the sum assured.

2. Returns

When it is about making any investment decision, one of the first few things that come to mind is the expected returns. When you buy a pure term insurance plan, your nominee becomes eligible for the death benefit only. There is no other return unless you have chosen a different type of term plan.

But with ULIP investments, you can expect good returns. To estimate the returns, use a ULIP calculator and check how much return you can expect from different premiums. Also, you should know that the returns from a ULIP depend on market conditions as well.

3. Ideal Time to Invest

When it is about protecting your loved ones from the extreme uncertainties of life, you cannot afford any delay. To secure your family member' s future financially, you should not wait for the right time to invest in a term plan. If you have started earning a decent salary and can set aside a certain amount for the premium, buy a term plan right away.

However, ULIP investments should be based on your financial goals in the long term. When you want to invest money to achieve a specific goal, and get the benefits of life insurance, start researching the best ULIP plan. Begin with using a ULIP calculator online and make an informed decision.

4. Lock-in Period

It is the period in which you cannot withdraw the amount invested in a financial instrument. Going by this definition, there is no such lock-in period associated with term insurance plans. You need to continue paying the premium in the chosen mode – annual, quarterly, or monthly to keep the plan in force.

As per IRDAI regulations, ULIPs has a lock-in period of five years. It is the period during which you cannot liquidate the value of invested amount. Before 2010, this period was limited to three years. After this period, you are allowed to make partial withdrawals. The terms related to partial withdrawals under ULIPs may vary from one plan to another.

5. Tax Implications

To encourage Indian citizens to get life insurance coverage, the Indian government facilitates tax deductions over the life insurance premiums. The tax benefits of buying ULIPs and term plans are almost similar.

- The premiums you pay for a term plan or a ULIP makes you eligible for tax deductions. These benefits fall under the purview of Section 80C, with an upper limit of Rs. 1.5 Lakh per year.

- The policy nominee receives death benefits with term insurance, whereas ULIPs offer both death benefits and maturity benefits. These pay-outs are tax-exempt, meaning the recipients do not have to pay any tax on receiving the benefit amount from the insurer.

The Bottom Line

Comparing ULIPs and term plans is like comparing wine with a soft drink. Although they are life insurance products, they are meant to serve different needs. A term plan protects your family in the event of your unfortunate death, while ULIP provides both life coverage and returns.

Therefore, it would not be wise to gauge their benefits with the same tape. It is advisable that you make a list of your financial goals and see where these two insurance products fall. You can then select the one that is more in sync with your priorities for life.