Choosing the right life insurance plan is more than just about safety and security; it is also about achieving your financial goals. Out of the multiple options, the two most common insurance plans are term insurance and ULIPs. While ULIPs offer insurance plus investment, a term insurance policy protects with a very low premium. But what is best for you?
With the variety of products available, understanding the fundamental differences between them can significantly impact your financial planning. This guide will reveal the differences and help you make an informed choice between ULIP and term insurance.
What is Term Insurance?
Term insurance is a type of life insurance policy that provides coverage for a specified term. If the insured dies during the stated term, then any named beneficiary would receive a lump sum cash death benefit. Term insurance provides life insurance coverage without any savings or investment components, and it typically costs less in premiums.
Some of the key features of a term insurance include:
- Affordable Premiums: Good coverage at inexpensive rates, affordable for most budgets and income levels.
- Fixed Coverage Amount: The sum assured is a fixed amount that you chose when you bought the policy.
- Flexible Policy Terms: Choose your term, ranging from 10 to 30 years or whole of life.
- Easy Premium Payments: Choose from annual, semi-annual, quarterly, or monthly payments.
- Add-on Riders Available: Riders can be purchased for awards, accidental death or serious illnesses, disability, and more.
- Simple Purchase Process: Easy to buy, with most policies requiring minimal paperwork, and many can be purchased online.
What is ULIP Insurance?
Unit-linked insurance plans (ULIPs) are a financial product that combines both investment and life insurance. As a policyholder, you pay a premium, a portion of which is allocated to life cover, and the remainder is invested in market-linked funds comprising equity, debt, or hybrid funds. ULIPs give you one plan to both build wealth with an investment function and life insurance protection to help ensure your loved ones’ financial well-being continues in your absence.
Here are some of the key features of a ULIP insurance:
- Dual Benefit: It provides the insured with life insurance cover and wealth creation potential through investments linked to the capital market.
- Flexible Premium Payments: Choose between single or regular premiums depending on personal convenience and based on financial planning needs.
- Lock-in Period: It has a minimum lock-in period of five years and will only allow part withdrawals or surrenders after this period.
- Market-Linked Returns: The value of the investment component varies based on the underlying fund’s investment performance in the capital market.
- Partial Withdrawal Facility: A partial withdrawal from the fund value is allowed, after the completion of the lock-in period, in order to meet unforeseen and immediate financial obligations.
Key Differences Between ULIP and Term Insurance
Term insurance and ULIPs are both life insurance products, but they serve very different purposes. Here’s a quick comparison to help you decide which suits your needs:
| Feature | Term Insurance | ULIP (Unit Linked Insurance Plan) |
| Purpose | Life cover that provides financial security to your family in case of your untimely demise. | Life cover with the possibility of growing wealth long-term through investment opportunities |
| Premiums | Low and highly affordable, as it focuses solely on protection. | Higher premiums because a portion is allocated to investments in market-linked funds. |
| Maturity Benefit | None (unless opting for a Return of Premium plan, which refunds premiums paid). | Offers a fund value at the end of the policy term based on market performance. |
| Investment Component | No investment component; it is purely risk-cover. | Part of the premium is invested in equity, debt, or balanced funds, as per your preference. |
| Lock-in Period | No lock-in period; coverage continues as long as premiums are paid. | There is a lock-in period of 5 years before any partial withdrawals can be made. |
| Flexibility | Limited flexibility; can add riders like critical illness or accidental cover for enhanced protection. | High flexibility with options to switch between funds and redirect future premiums as per market or personal needs. |
| Risk Factor | No risk is involved as it doesn’t depend on market performance. | Carries market risk as returns are linked to equity and debt fund performance. |
| Best For | Individuals who want maximum protection at minimum cost to secure the financial future of all family members. | Those looking to combine insurance with wealth creation for long-term financial goals. |
| Partial Withdrawals | Not applicable; no cash value during the policy term. | Partial withdrawals are allowed after the 5-year lock-in period to meet financial needs. |
| Affordability | The cheapest form of life insurance in which you get a significant sum assured for a low premium. | Less affordable because of the insurance policy investment part. |
| Goal Suitability | Ideal for covering liabilities, dependents’ needs, and ensuring family security in case of an untimely demise. | Suitable for long-term goals like retirement planning, a child’s education, or wealth accumulation. |
Why Should You Choose Term Insurance?
Term insurance is a great choice for those wanting basic protection for an affordable price. Here are instances where it might work for you:
- Best suited for those with dependents. Coverage reassures dependents that your death won’t negatively impact their lifestyle, aspirations, and goals.
- It will help clear any loans or liabilities your family might incur, such as home or car loans, without concern for short-term financial issues.
- Term insurance is best suited for young and healthy individuals, allowing them to lock in higher coverage at lower premiums.
- Most assured, at a very affordable premium. Best of both worlds.
Why Should You Choose ULIP?
ULIPs are ideal for you if you want to combine life insurance and long-term investment returns. You may consider ULIPs for the following reasons:
- Great for long-term goals, such as a child’s education, retirement, or buying a house, with disciplined savings.
- Appropriate if you can handle the market risk and want the potential for higher profits.
- Allows you to transfer your money between funds as your financial goals or market conditions require.
- There are tax benefits available on premiums for a ULIP, as well as on the maturity or death benefits, as per sections 80C & 10(10D).
How to Decide Based on Your Life Stage and Goals?
The stage of life and your financial goals will significantly influence your decision between ULIP and term insurance. Here are some guidelines to help you choose what matches your needs:
- Young Professionals (25–35 years): Term insurance is good for ensuring you have high coverage at a low premium while focusing on your career. ULIPs can be helpful in getting started with wealth creation for your longer-term goals.
- Midlife (35–50 years): Combine term insurance for family protection with ULIPs to grow a corpus for children’s education, marriage, and your retirement planning.
- Pre-Retirement (50–60 years): If you have dependents or debt, keep term insurance and find ULIPs with low-risk funds to preserve your retirement savings and earn returns.
- Retirement Years (60+): Term insurance is usually not needed if your family is independent; rely on ULIP returns or pension plans to manage healthcare and lifestyle expenses.
Choosing between term insurance and ULIPs depends on your financial goals and priorities. Although term insurance is generally a low-cost way to provide safety for your family, ULIPs do offer protection and the opportunity to build wealth. For many, a combination of the two works best, with the term being the safety vehicle and ULIP being the long-term investment vehicle. Take the time to examine your individual needs and then ask for professional help in making the right choice for your future.
