ULIP vs Term Insurance: What to Choose?

Life insurance is a non-negotiable necessity for securing a family's future. But with so many types of insurance plans in the market, how can you choose the best one? Moreover, not all insurance plans are built in the same way. One of the most debated questions is ULIP vs term insurance. The best choice between the two eventually depends on your financial goals, risk capabilities, and how you plan to grow and protect your wealth in the long run.

To make your decision-making process easier, we will break down the key differences between ULIP and traditional plans, along with the pros and cons, to understand ULIP vs term insurance concepts.

What is Term Insurance?

Term insurance is essentially a traditional insurance plan that offers risk protection to the policyholder. It offers financial compensation for your family or the nominee in case of your untimely death. The only downside is that term insurance does not offer any maturity benefit if the policyholders survive through the term.

Key Features of Term Insurance are:

• You can get sum assured benefits under term insurance with annual premiums, which are quite affordable.
• Whatever premium you pay is contributed towards the risk coverage, as it does not include savings or returns.
• You can decide the policy term that can range anywhere from 10 to 14 years, depending on your retirement plans and your age.
• Term insurance can also qualify for deductions under section 80C (can be availed only if the old tax regime is followed).

Why Should You Opt for Term Insurance?

The primary reasons why you should go for term insurance are listed below:

• Term insurance can help to replace the lost income in case of the untimely death of the policyholder/sole breadwinner.
• Term insurance will also help your family manage daily expenses, loans, EMI, and other financial needs in your absence.
• Term insurance is a necessary safety net that you can provide for your dependants.

Term insurance doesn't necessarily build wealth, but it does ensure that your family is protected financially in case something happens to you.

What is ULIP?

ULIP, or Unit-Linked Insurance Plan, is a financial product that is a hybrid. It combines life insurance and market-linked investments. When you purchase a ULIP, a part of your premium goes towards giving you life cover, and the remaining part of your premium is invested in either equity, debt, or mutual funds.

Key Features of ULIP are:

• The premiums are partly contributed to life insurance and also to market-linked investments.
• The policyholder gets to choose where they want to invest their premium.
• Several ULIPs also allow switching between funds depending on market performance and risk tolerance.
• Usually, ULIP comes with a five-year lock-in period, which is mandatory, as it promotes long-term financial discipline.
• Tax benefits can also be availed if you have invested in a ULIP, only if you follow the old tax regime.

Why Should You Opt for ULIP?

The primary reasons why you should opt for ULIP are listed below:

• If you're looking for the convenience of insurance and investment under one plan, ULIP is a great option.
• Go for ULIP if you are comfortable with marketing risks and can stay invested for a long period.

ULIP is best for people who are looking for structured and goal-based investments that can also provide life insurance. However, the premiums can be higher and the returns on your overall investment are lower, as it also involves market risks

Term Insurance vs ULIP: Key Differences

You must understand the differences between ULIPs and traditional plans before you decide. Although both options will provide life insurance, their purpose, structure, returns, and cost can be different from one another.

Below is a table that will clearly explain the term insurance vs ULIP concept:

Advantages and Disadvantages of Term Insurance

Term insurance is by far the most cost-effective way to secure your loved ones in an unfortunate event financially. However, with different benefits, there are also certain disadvantages of term insurance, and they are listed below.

Advantages of Term Insurance:

• Term insurance comes with affordable premiums while offering high coverage. A policyholder can have a cover amount of ₹50,00,000 to ₹1,00,00,000, with an affordable premium that typically ranges from ₹1000 to ₹2000 per month.
• Term insurance has a simple and transparent structure that is easy to understand even for first-time buyers.
• It acts as an income replacement for your dependants in case of your untimely demise.
• A policyholder can also take additional cover such as accidental death benefit, critical illness cover, waiver of premium, and income benefit rider.

Disadvantages of Term Insurance:

• Term insurance does not offer maturity or a survival benefit.
• Under term insurance, the premium amount can increase as you age. If you buy a policy at a younger age, the premiums will be minimal; however, if you buy the same insurance at an older age, the premiums will be higher.
• It is a pure protection policy, and hence, there is no wealth creation.
• In case you miss a premium, the policy can lapse, which can lead to the loss of coverage.
• You get limited flexibility, where in some cases you cannot even increase the coverage later in the policy period.

Advantages and Disadvantages of ULIP

ULIPs are policies that are a blend of insurance and investment. However, due to the different advantages and disadvantages, it is not suitable for everyone. It is essential that you understand the offerings clearly so that investing in ULlP doesn’t turn out to be a mistake. Let us look at the advantages and disadvantages of ULIP.

Advantages of ULIP:

• Offers life insurance plus market-linked investment under one plan.
• Offers long-term wealth creation via different fund options. Allows a tax-free maturity benefit under section 10 (10D) (it is subject to conditions).
• It is flexible when it comes to switching funds to adjust your portfolio as per current market trends.

Disadvantages of ULIP:

• Considering the allocation, mortality, and fund management charges, the premiums can be higher.
• The returns are entirely dependent on how the market performs and hence involve risk.
• First-time investors may find the ULIP a little complex.
• As there is a lock-in period of five years, policyholders get limited liquidity.
• It underperforms mutual funds, as the costs are higher and the fund choices are limited.

ULIP vs Term Insurance: Which One Is Better?

To conclude, ULIPs may look like a better option, but it's better to keep your investment and insurance separate. By opting for term insurance and separately allocating funds in an FD or mutual fund can bring considerably better returns and provide you with coverage in the same amount. It is easy to get confused when it comes to ULIP and term insurance, especially when the person selling you ULIP exaggerates the benefits. Always remember term insurance is the best for life cover at affordable premiums.

FAQs About ULIP vs Term Insurance

Is term insurance cheaper than ULIP?

Yes, as term insurance only provides death cover and does not involve investments, the premiums are lower.

Can I buy both ULIP and term insurance?

Yes, you can have both to meet your requirements concerning insurance and investment in a better way.

Is ULIP better than mutual funds?

If you're looking for insurance along with investments, then ULIP is better. However, if you are solely looking for investments, investing in mutual funds is more profitable.

Does ULIP offer riders?

Some insurers offer riders under ULIP, and some don't. Hence, it is best to check with the insurer beforehand.