Life’s journey is uncertain, so securing loved ones’ financial well-being is top of mind. Life insurance is necessary protection, yet deciding between Term Insurance and Unit Linked Insurance Plans (ULIPS) can be perplexing. This article explains the fundamental features, advantages, and differences between these popular Indian insurance plans to inform your choice. Term plans provide clean, low-cost protection for a term, whereas ULIPS embed insurance with market-linked investment.
Knowing their distinctions in terms of cost, coverage, risk, and possible returns is instrumental in making the best choice for the appropriate shield to protect your family’s financial future. Here are the choices for you to consider.
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Understanding Term Insurance in India: Key Features and Benefits
Indian term insurance is a simple life cover for an agreed term. You pay low, regular premiums. If you pass away within this ‘term,’ your loved ones receive a lump sum (death benefit). If you live longer than the term, nothing is repaid.
Key features include affordability, high coverage for the cost, a selected term length, and a lump sum paid out if you die. You can often take additional coverage for critical illnesses. Premiums can provide tax relief, and the payment to your loved ones is generally tax-free.
The primary advantage is financial security for your family if you are not around anymore. It can cover daily costs, debt, and long-term objectives. It gives you peace of mind with the knowledge that your family is covered for the selected duration. Consider it as a financial security net for your family’s financial future for a set period.
ULIP vs Term Plan: A Comprehensive Comparison
The Term Plan is plain protection. It’s a kind of financial armour for a particular period. You pay a small periodic fee (premium). If you pass away within this period, your family receives a huge amount of money. If you survive beyond the term, the armour vanishes, and you receive nothing in return. It’s affordable and provides high coverage, with only one motive: to secure your loved ones financially if you are not there.
ULIP (Unit Linked Insurance Plan) is a hybrid instrument: protection + investment. A portion of your premium is used for life insurance (such as the term plan), and the remaining portion is invested in the stock market, bonds, or a combination, depending on your choice. Thus, it provides growth potential for your money along with life cover. But the returns vary with the market, and there are typically fees for handling the investment aspect. You may receive some cash when the plan matures, depending on the performance of the investments.
Consider this:
Term Plan: Just a cheap, easy-to-buy umbrella for a given rainy season (your policy term). If it rains (you die), your family remains dry (receives the money). If the season passes and it didn’t rain (you lived), the umbrella disappears.
ULIP: A raincoat that also has a piggy bank attached to it. It keeps you dry, and you can also deposit coins in the piggy bank, expecting them to grow over time. But the coins’ value may increase or decrease.
Key Difference: A Term Plan is only for protection. ULIP combines protection with investment, providing potential returns but also market risks and charges.
Also, check – The Role of ULIPs in Financial Planning
Why Choose Term Insurance? Insights and Advantages
You opt for term insurance primarily because it is the most affordable means of obtaining substantial financial protection for your loved ones for a certain number of years.
It’s like purchasing a huge safety net at a small price. You pay a relatively low recurring fee (premium) for a very large possible return (sum assured) if anything bad occurs to you within the selected period. This leaves your loved ones in good financial standing without requiring you to invest a large portion of your present savings into it.
The other important reason is its transparency and simplicity. You know precisely what you’re paying for – straightforward life cover for a specific period. There are no convoluted investment elements or maturity advantages to get to know.
Additionally, you can coordinate the coverage length with your major fiscal obligations, such as when your children are still young, when you still owe loans, or until your retirement savings kick in. This personalised strategy safeguards your loved ones when they need it the most.
In essence, you choose term insurance when your utmost concern is having maximum financial protection for your loved ones at minimum cost, without the complications or investment returns of investment-linked policies. It’s all about straightforward protection and assurance in your working years.
Investment vs Protection: The Role of ULIPS in Financial Planning
ULIPS attempt to accomplish two things simultaneously: make your money grow (investment) and save your life (insurance).
It’s like a hybrid vehicle. It runs on electricity and petrol together. In the same way, with a ULIP, some portion of the money you pay (premium) is utilised to give you life insurance coverage, and the remaining amount is invested in avenues such as stocks or bonds to make your wealth grow over time.
Why would this be helpful in financial planning?
1. Convenience: You deal with both insurance and investment in a single plan.
2. Goal-Based Saving: ULIPS can assist you in saving towards long-term objectives such as retirement or the education of children, alongside a safety net for your loved ones.
3. Flexibility: You usually have the freedom to decide where your money is invested, and you can sometimes switch between investment types depending on your comfort level with risk and the state of the market.
4. Tax Benefits: Similar to term plans, the premiums you pay towards the insurance component can have tax benefits, and the returns at maturity could also be tax-free under specific conditions.
If the premium paid by an individual in a year is less than Rs 2.5 lakh, the returns will be tax-free u/s 10(10)D. But if the premium paid is higher than Rs 2.5 lakh in a year, you need to pay taxes.
However, keep in mind that the investment component of a ULIP has market risks, meaning your returns aren’t assured and may increase or decrease. ULIPS also typically have charges for overseeing both the insurance and investment aspects that affect your net returns.
Therefore, ULIPS provide a means of uniting investment growth potential and life protection in one product. They may be suitable for individuals seeking this union and are willing to accept some investment risk, but it is important to realise the costs and how they may impact your returns versus having insurance and investments separate.
Expert Life Insurance Advice: Making the Right Choice for Your Needs
Selecting the appropriate life insurance involves prioritising your loved ones’ future security. First, determine who your income depends on and their possible financial requirements if you were not around. Reflect on how long they would require support and your available budget.
Know the fundamentals: term plans provide pure, low-cost protection for a specified period, whereas ULIPS mix protection with investment, with market risks and fees. Choose the one that suits your objectives and risk tolerance.
Choose a good insurer and read the policy terms carefully, such as what is covered and the exclusions. Don’t wait, as premiums tend to be lower when you are younger and healthier. Be honest in your application.
Review your coverage regularly as life evolves. The right decision is the one that brings sufficient financial protection for your family, with you having the assurance that they’ll be taken care of.
Also, Check – Benefits of Term Life Insurance
On a parting note…
Selecting between ULIP and term insurance is your choice. Term insurance provides pure, low-cost life cover for a specific term, best suited to provide maximum protection for your family at minimal cost. In case you die during the term, your family gets a lump sum. It’s simple and inexpensive.
ULIPS integrate insurance and market-linked investment, providing scope for growth in addition to life cover. There are, however, risks attached to returns, and there are charges involved. ULIPS are appropriate for those who desire protection and investment in a single policy, and are ready to take some risk for possible gains.
Evaluate your risk tolerance and financial goals. If your concern is only to secure your family’s future at the least possible cost, term insurance would probably be the best option. If you want growth in investment along with insurance and are willing to accept market volatility, a ULIP could be an option, considering the cost factor.
Please share your thoughts on this post by leaving a reply in the comments section. Contact us via phone, WhatsApp, or email to learn more about mutual funds, or visit our website. Alternatively, you can download the Prodigy Pro app to start investing today!
Why would one take term insurance?
It provides large coverage at an affordable cost, solely for financial security for the family.
What are the advantages of a ULIP?
It is a mix of insurance along with investment returns potential in a single policy, providing convenience.
Is the term plan payout taxable?
Typically, the death benefit paid to beneficiaries under a term plan is tax-free.
Do I need to consider risk tolerance while selecting?
Yes, ULIPS carry market risk, as opposed to the guaranteed payout of a term plan.
Disclaimer: This article is for educational purposes only and does not intend to substitute expert guidance. Mutual fund investments are subject to market risks. Please read the scheme-related document carefully before investing.
Assistant Vice President – Research & Analysis
Akash Gupta heads the Research & Analysis department at BFC CAPITAL, where he combines in-depth market insights with strategic analysis. He holds multiple certifications, including:
- NISM-Series-XIII: Common Derivatives Certification
- NISM-Series-VIII: Equity Derivatives Certification
- NISM-Series-XXI-A: Portfolio Management Services Certification
- IRDAI Certification
With his expertise in equity, derivatives, and portfolio management, Akash plays a key role in providing research-backed strategies and actionable insights to help clients navigate the investment landscape.
