Life Insurance is a legal contract between the two parties, namely the insurance provider & the policyholder, wherein the insurer guarantees to pay the nominees in case the insured dies against the premium amount paid by the policyholder during their lifetime.
The choice of the right insurance policy might differ from one individual to another, as what may suit you is not a possibility for someone else; it is not. In this article, let us understand the difference between the two types of life insurance plans, namely, ULIP & term plans.
What is Term Insurance?
A Term Plan is a type of life insurance where a specific amount is mentioned to the nominee to be received on the policyholder’s demise. It is a cost-effective life insurance plan that is considered quite useful due to the financial compensation being offered to the dependent family members. A Term Insurance policy is vital as it offers comprehensive life protection coverage to the family members of the policyholder in case of a sudden demise.
What is ULIP?
ULIP is a type of life insurance which it includes two components, namely insurance & investment. Unlike term insurance, ULIP offers a part of the premium to be paid towards life insurance &the rest towards investment. One can opt to invest in debt, equity, or both, depending upon the financial objectives & risk acceptance level, making it an ideal investment option. It provides flexibility to switch between the funds anytime during the policy tenure.
In case of the death of a policyholder, the nominees will receive the return on investment or the amount of sum assured, whichever is higher. &, if the policyholder survives the policy, they will receive the fund value.
Difference between a Term Insurance & ULIP
Provided are the differences between Term insurance & ULIP Plans:
| Basis of Difference | Term Plan | ULIP |
| Type of Plan | Includes Insurance only | Includes insurance & investment |
| Best Suited For | Those who are looking for financial security | Those who are looking for financial security & investment |
| Investment | Not included | Market-linked investments |
| Insurance | Included | Included |
| Returns | Does not include maturity benefits | As they are linked to the market, hence higher returns |
| Cost Effectiveness | Lower premium cost, hence cheaper | Includes investment factor also, hence expensive |
| Time of Purchase | As soon as possible, to get financial security at a lower premium cost | When you need investment & insurance both. |
| Charges | Includes mortality charges | Includes fund management, premium allocation, & mortality charges |
| Lock-in period | Flexible with no lock-in period | 5 years |
| Security | Offers financial protection to the nominees of the policyholder in case of their sudden demise. | It includes life coverage also, but is linked to the market. |
| Maturity Benefits | It does not include maturity benefits | Depends on the performance of the fund |
| Tax Advantages | A deduction of tax can be availed u/s 80C on the amount of premium paid. Also, the death benefit received is exempt from tax u/s 10(10D). | Premium amount & maturity amount are both eligible for tax benefits. |
| Switching Options | No switching between the funds, as it included insurance only | Allows switching between the funds depending on the market scenario. |
| Tenure | Fixed term | Flexible term depending on the financial objectives |
| Returns | No returns | Higher returns as linked to market. |
Features of ULIP
Provided below are the salient features of ULIP:
- ULIP has its dual benefits of insurance with investment, which allows wealth growth &financial security for family members.
- It provides life coverage to the policyholder’s nominees in case of the sudden demise of the policyholder, hence providing financial support to the family.
- The fees &charges are clearly disclosed, which helps in making informed decisions.
- It offers many fund options, such as equity for high growth &debt for stability, which fulfil all types of risk tolerances.
- It provides flexibility to adjust between the funds, allowing you to switch your investments as per the market conditions &your risk tolerance level.
- Get your funds withdrawn partially from your fund value after the lock-in period is completed to meet emergency situations.
- Get a tax deduction on the amount of premium paid u/s 80C, &the amount of proceeds to be received on maturity is exempt from tax u/s 10(10D).
Features of Term Plan
Provided below are the salient features of Term Plan:
- It provides financial assistance to the policyholder’s family members in his/ her absence to maintain their lifestyle & meet their financial obligations.
- These plans are simple enough to underst&, making it easy to underst& the terms & conditions of the policy.
- These plans are flexible, i.e. a policyholder can add riders like accidental death benefits or critical illness.
- A term plan offers a huge amount of coverage at a low premium cost as compared to other insurance policies.
Which One to Choose: ULIP or Term Insurance?
ULIPs should be chosen in case of the following cases:
- This plan should be opted for in case life insurance coverage is also required with investment.
- In case you wish to switch between the funds depending on the market conditions.
- If you consider yourself to be financially independent & stable in the near future.
- In case you need tax benefits on investments made & ascertain the returns using a ULIP Calculator.
- If you are considering long-term investments with limited liability,
Term plans should be chosen in case of the following cases:
- A high coverage of life insurance protection is needed at a reduced cost.
- If providing financial security to family members in your absence is your priority.
- In case you hold other investment plans, a term plan can be an appropriate choice to complete your financial strategy.
- If no maturity benefit is needed, because this plan only pays in case of your death & not if you survive the plan.
Conclusion
There are multiple factors on the basis of which one can decide whether to buy a term plan or ULIP, such as financial objectives, risk appetite, & financial protection required. Hence, assess your requirements & objectives from the plan & then choose accordingly. If your main objective is only protection coverage at a reasonable cost, go for a term plan. But if you want some investment factor also to be included, reach out for ULIPs.
