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 Understand how ULIPs differ from term plans

Gone are those days when people bought traditional life insurance by paying hefty premiums that offered no additional benefits. Nowadays, everyone does their own research before buying any financial instruments. This has led to the rise in popularity of life insurance products like Unit Linked Insurance Plan (ULIP) and term insurance. Both are life insurance policies with distinguished features, offering several benefits. Read further to understand the meaning of ULIP and term insurance, along with knowing the difference between them.

Meaning of ULIP

A ULIP is a two-in-one product as it offers life insurance and investment. When you buy a ULIP, the premium that you pay for your policy is partly used towards providing insurance and partly towards investments. You can choose the investment based on your risk appetite. An individual who can invest in high-risk funds may choose equity funds, as they offer high returns for those risks. People who are looking for safer investments choose to invest in debt funds. They have low risks but comparatively offer lower returns. The ones who want moderate risks choose balanced funds comprising both equity and debt investments. Most ULIPs also allow the policyholders to switch between funds anytime they want. Based on your goals, you can use a ULIP calculator and invest accordingly. This flexibility has led to the rise in the popularity of ULIP, as, along with securing life, it enables long-term wealth generation.

Meaning of term insurance

Term insurance, as the name suggests, is a life insurance policy, where the policyholder gets cover for a fixed tenure. The tenure is decided by the policyholder when they purchase the plan, and the premiums are decided accordingly. The remarkable feature of a term policy is that they offer huge coverage for low premiums. In case of the demise of the policyholder within the tenure of the policy, the nominee will receive the sum assured. However, there are no benefits provided when the policy matures. In case of the sudden demise of the policyholder, their liabilities and dependents are taken care of. Also, along with the base term plans, one can choose riders like waiver of premium, accidental death benefit, critical illness rider, or return of premiums. Riders are like add-on benefits to the base insurance that you can avail of with additional premiums.

Difference between ULIP and term insurance

At its core, both ULIP and term insurance are types of life insurance that offer different benefits. Here are some core parameters where a ULIP differs from a term plan:

  • Type of product
    A term policy solely provides life insurance to the policyholder. It has no savings or investment component attached. While a ULIP is a dual product comprising life insurance and investment, where funds are partly invested in both.
  • Benefits post-maturity
    Term insurance offers no returns, as the money is not invested in any instruments and is simply used towards insurance. Whereas, depending upon your fund allocations, you receive returns in ULIPs. In the long run, with the help of compounding, ULIP helps in achieving long-term goals.
  • Tax benefits
    The premium you pay, and the sum assured for a term insurance plan are exempt from taxes. A ULIP offers tax benefits on multiple levels where along with the premiums and the death benefit, even the maturity amount is tax-free. The several tax benefits compel individuals to purchase ULIPs.
  • Premiums
    The premium of term insurance is comparatively low. Since, it is a basic form of life insurance. Whereas the premiums of ULIPs are comparatively higher, since there are investment components attached. Whichever insurance you choose, it is essential that you choose a premium that you can easily afford throughout the tenure of your plan. Use a ULIP calculator to get an estimate of the premiums you need to pay for your desired cover.
  • Emergency fund
    Term insurance does not have any investments, and hence, does not have any funds to access. While ULIPs, even though they have a lock-in period of 5 years, let a policyholder withdraw funds anytime they need, after the period ends. This helps in case of emergencies.
  • Return on investments
    Term insurance offers no return on investments, since it is basic life insurance. With ULIP, you can invest in different funds and switch between them to maximize your utility. The longer you keep it, the more likely that the higher will be your returns.

ULIP and term insurance have their own unique features and benefits. They are ideal for different individuals as they cater to different needs. It is important to access your needs and make the right choice accordingly.

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