If you are planning to build a financial corpus for your family, it is imperative that you don’t put all your eggs in one basket. Make sure that you mix insurance and investments in your financial portfolio to get much better returns.
There are a number of investment products offered by the top insurance companies in India. But it can be confusing to decide the one, especially when there are so many investment options. However, you can plan to put your money in Term insurance plans and ULIPS.
And if you are having a hard time in deciding between ULIP and term insurance options, here’s a quick rundown of the two products to help you decide the one.
So, what are ULIPs and Term Insurance Plans?
If ULIPS and term insurance are alien terms to you, then this article will help you choose the most viable option that helps you in getting the desired returns.
Unit Linked Insurance Policy or ULIPs
In ULIPs, a portion of the premium amount is invested in funds such as equities, bonds, debts and market funds depending on the investor. Another portion is kept aside as mortality charges.
Simply put, ULIPs are a good investment option for people who want both investment and insurance benefits in one plan. And is the best way to inculcate saving habits and avoid capital gain tax.
Term Life insurance Plan
A term life insurance plan ensures financial security to your family and your nominee’s in case of your sudden demise. You can choose the policy term for as long as you want to avail the benefits, it can be 20, 30, 45 years and so on.
All you need to do is pay the premium annually to avail the benefits till the end of the policy term.
Buy this plan if you want pure death benefits with no investment module. The premium that you pay annually ensures covers only the death risk.
If the policy is in your name, then you can decide the amount of sum assured. This is the amount that you nominees or your loved ones would be compensated in case of your death.
It is advised that select the sum assured amount that is 10 to 15 times higher than your yearly income and covers the debts or loans you might have.
As it is a pure death benefit plan, your nominee is offered compensation only in case of death. The plan does not offer any maturity benefit, and there will be no returns in case you outlive the span of your term insurance plan.
Moreover, the premium paid towards the term insurance policy offers you tax benefits under section 80C. Nevertheless, the amount compensated to your nominee is completely tax-free.
Is it viable to depend on just that? Let’s see how.
Difference between ULIPs and Term Life Plans
|Factors to Consider||ULIP/ Unit Linked Insurance Policy||Term Insurance Policy|
|Product Type||Investment + Insurance||Insurance only|
|Tax Deduction||Exemption U/S 80C and 10(10D)|
|Investment||A portion of the premium is invested in equity, bonds, debts etc.||N/A|
|Insurance||Premium is used as mortality charges against the death benefits||Purely an insurance product|
|Returns||Moderate returns based on the market and the funds allocated||Do not offer investment returns. However, the sum assured is recompensed on the death of the policyholder|
|Reasons to Buy||To secure your future and offer protection to your loved ones against mishaps||To get both protection and long-term investments returns|
|Charges Applicable||Agent fees, administration fees, funds management and allocating charges, and fund switching charges||Only the premium amount|
|Policy Term/Periods||To get higher returns you can opt for 10 to 15 years of policy term||As long as your family members are dependent on you|
|Ideal Term||Long Term||Long Term|
|Ideal Time to buy||Anytime based on your requirement and the saving amount||Between 25 and 35 years of age|
|Switching Options||Switching is possible between the funds linked in the plan and also to change the risk-return||N/A|
|Locked up Period||Min: 3 to 5 years||Annual renewal is required|
|Security||There is no security||Highly secured|
|Maturity Benefits||You can redeem units at the prevailing unit prices||No maturity benefits unless opted for Return of Premium Plan|
Benefits of Buying a Term Insurance Plan
Definitely a smart investment option, to offer financial coverage to your dependents, in case of your sudden demise.
Low Premium Cost
Term life plans are one of the most affordable life insurance plans with no additional costs. You get higher sum assured as compared to the cost of the premium. The simple policy offers you and your family the peace of mind. Moreover, you can opt for rider benefits by paying an additional amount of premium.
The premium paid for a term plan is locked for the entire policy term. For instance, if you buy a term plan at the age of 30 for Rs. 25 lakhs and the monthly premium that you pay will be applicable till the end of the policy term. Therefore, it is recommended that you buy a term insurance plan, at an early age.
Benefits of Investing Money in ULIPs
ULIPs offer you the flexibility to invest your money as per your financial requirements, risk profile, and feasibility. Myriad of options are available to invest either in hybrid funds, debts or equity.
You have the option to select the funds to invest your ULIP money. You switch or transfer the accrued amount among 6 to 8 fund options that are available.
But, you are allowed to switch only for a fixed number of times. It varies from insurer to insurer and there is a nominal fee attached to switching the plans.
There are no tax implications of switching between the funds.
Why Buy Term Insurance Plan?
- A comparatively low premium component as compared to other life insurance plans
- Term Insurance plans come with death benefits and there is no risk involved in buy a term life plan
- The sum assured amount provided by term insurance is relatively higher as compared to other life insurance plans
Why Buy Unit Linked Insurance Plan?
- ULIPS come with maturity benefits
- ULIPs offer both life insurance cover and investment opportunities
- A good option for those who are planning to invest in long-term at least for 10 years
In a nutshell
Clearly, both ULIPs and term life insurance plans serve two different investment purposes. Term insurance is completely a protection plan, whereas a ULIP serves both insurance and investment requirements.
Usually, ULIPs are considered for investment purposes to build a corpus for your golden years or for your future financial requirements. And a term plan is beneficial, in case of your death or the breadwinner of a family. It will provide the financial cushion to your loved ones when you are no longer there to help them financially.