Term Insurance vs ULIPs – Which One Should You Choose?

Unit-linked insurance plans (ULIPs) and term insurance are a useful tool to protect the lives of dependents if an untoward incident takes your life. However, they vary from one another from various angles. If you are looking at options to protect your family from financial constraint, then you have to take a close look at ULIPs and term insurance. 

What is Term Insurance?

Term insurance is a pure life insurance policy. Meaning, you get a life cover of a specified sum in exchange for the periodic premiums you pay. The premiums you pay are not invested anywhere and goes only towards securing your life. If an unfortunate event takes your life within the term of the policy, then the beneficial nominee of your term life insurance policy would be paid with the sum assured of the plan. 

The premiums of term insurance policies are very nominal as compared to the sum assured you get in exchange. However, there are no survival benefits. In simple words, if you happen to survive the tenure of the insurance policy, then you don’t get any payouts from the policy. However, there are riders available that provide survival benefits, but they come at an added premium.

A right term insurance policy helps you ride the wave of uncertainty with utmost confidence as the lives of your dependents would be secured. The sum assured of the plan would be payable only to the nominees mentioned on the policy, and others, no matter how they are related to the insured, would not have a claim on the sum assured. However, debtors (if any), would precede over any of the nominees. 

If you have a big-ticket loan (such as a home loan) on your shoulders and you pass away within the tenures of your term insurance policy and home loan, then the proceeds of your term life insurance would first be claimable by your home loan lender, and the remaining (if any) would go to the nominees. You can add multiple nominees to your policy and also specify their share in the sum assured of the plan. 

Also Read: Why Do You Need an Emergency Fund?

With a term life insurance, you can lead a stress-free life as your liabilities will be taken care of and at the same time, you leave behind a legacy despite an untimely death. The lives of your dependents would be secured, which is paramount to you. Term life insurance policies can be attached with additional riders. The most prominent rider is critical illness plan, which pays out a sum assured if the insured is diagnosed with a critical illness. This sum assured is in addition to the sum assured of the life policy.

You have to go through the various riders available and select only the ones that you deem necessary. Individuals that are the breadwinner of their families should necessarily have a term life policy. Also, the fact that term life policies provide tax deductions should make them automatic inclusion in your finances. 

What are ULIPs?

Unit-linked insurance plans (ULIPs) is a single financial instrument that combines insurance with investments. This is a very lucrative option as you get a means to plan your future and at the same time, protect your dependents from facing financial difficulties if you pass away within the term of the ULIP. 

The premiums you pay towards ULIPs contains two portions. The first portion goes towards securing your life while the second portion is invested in the securities of your choice. If you happen to survive the term of the policy, then you are paid out with the survival benefits, generated by the portion of your premium which gets invested. In case you die within the term of the policy, then the nominees will be paid with the death benefits. 

ULIPs can be compared with endowment plans as they provide some payout on surviving the policy’s term. You get the liberty to choose the kind of securities that you want to invest the investment portion of your ULIPs’ premiums. You can choose to invest in debt or equity as per your requirements, risk profile, and investment horizon. 

ULIPs provide you with the opportunity to switch your investments at any time, with no hassles. If your investment portion of the premium is currently getting invested in the debt instruments, and if you like to invest in equities, or vice versa, then you can switch your investment. 

The survival benefits of ULIPs is entirely dependent on the performance of your investment portion of the premium. If you have opted to gain exposure to the equity markets, then your survival benefits would be necessarily linked to the market performance. If your investment portion of the premium is invested in debt securities, then your survival benefits would depend on the repayment ability of the issuing entities. 

Differences Between Term Insurance and ULIPs:

Parameter Term Insurance ULIPS
On offer Pure life Cover Life cover and investment
Premiums payable Lower as the entire premium goes only towards securing your life Higher as it is split into two parts; premium for life cover and investment
Survival benefits No survival benefits if there are no relevant riders availed There is a survival benefit as a portion of your premium goes towards investments
Risk No risk as the policy offers only life cover Can be risky if the underlying instruments of your investment underperform
Returns No returns as the policy only offer life cover Depends on the securities you choose to invest
Switch option No such option available since there is no investment being made by availing the policy You can switch from debt to equity, and vice versa, depending on the market developments
Tax deductions Can be claimed under Section 80C and 10D Can be claimed under Section 80C and 10D
Rider facility Available Available 

If you are looking to obtain a pure life cover, then you may avail a term life insurance policy. But remember that you are not going to get any payouts from your term life insurance policy if you happen to survive the term of the policy if you have not have availed suitable riders. On the other hand, ULIPs provide both life cover and survival benefits if you live through the policy tenor.

You have an option to switch between the funds under ULIPs depending on your requirements and risk profile. If you have made investments elsewhere, and are not covered under a life insurance policy, then you may opt to avail a term life insurance. If you require both life cover and an investment instrument, then you may choose ULIPs. 

For any clarifications/feedback on the topic, please contact the writer at vineeth.nc@cleartax.in

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