Term Insurance and ULIP (Unit-Linked Insurance Plan) are two important types of insurance plans. In order to figure out which of these crucial insurance plans will suit your needs, you need to know the difference between the two through a comparative analysis of ULIP vs Term insurance. Insurance plans are meant for financial protection against the emergencies of life. Depending on the type of emergencies they cover and the services they offer, there are a variety of insurance plans offered by life insurers. Unit Linked Insurance Plans (ULIP plan) offer protection as well as opportunity for wealth creation. Term Insurance plans offer comprehensive coverage at affordable rates and are not meant for investment purposes.
What is ULIP Plan?
Unit Linked Insurance Plan (ULIP) offers the dual advantage of wealth creation and protection. ULIP allows you to invest in a variety of market-linked funds. The market-linked funds where the investment takes place depends on the risk taking capability and financial goals of the policyholder.
In ULIP, the investment grows according to the growth in the market. Through ULIP, you can choose to invest in equity and/or debt funds according to your financial needs and aspirations. The investors buy units at their ULIP NAV (Net Asset Value). In simple words, ULIP NAV is the price at which the units are bought or sold, meaning that it is the market value of the ULIP fund after adjustment for charges.
ULIP policy offers a death or maturity benefit. The fund value is paid out on maturity.
ULIP is a flexible mechanism for investment as well as for protecting your family against the emergencies in life. ULIPs also come with tax benefits, which makes them an indispensable investment tool. Union budget 2018 introduced LTCG (Long Term Capital Gains) tax under which LTCG of over Rs. 1 lakh in equity investments and equity mutual funds will be taxable at 10% without indexation benefits. However, ULIPs are currently the only equity-linked investment tool, which do not attract LTCG tax.
Along with acquiring basic knowledge of what is ULIP plan, you need to be aware of the ULIP plans available in the market that can be customized and tailor made to meet specific financial requirements and life goals that you may have. ULIPs can help in achieving specific life goals such as children’s education, buying a dream home, planning trip abroad etc.
What is Term Insurance?
Term Insurance plan provides coverage for a fixed period. The policyholder has the option of deciding the policy tenure. Term Insurance is a kind of life insurance where the premium is entirely used as life cover for the policyholder. A term insurance plan does not come with any maturity benefit. The sum insured is paid out on death of the policyholder. As there is no maturity benefit, the entire premium amount is utilized for covering the life of the insured. Term insurance is an affordable insurance plan as they offer lower premium rates along with a high sum assured as compared to other insurance plans.
Key Differences Between Term Insurance And ULIP
Now that we know what ULIP plan is and what is term insurance, let us dive into the basic differences between the two insurance plans.
1. Savings Component
ULIP policy combines the benefits of savings and protection horizon under the same policy. Policyholders can invest in equity, debt funds or a combination of both. Term insurance plan does not have any savings component in it. The entire premium goes into covering the life of the insured in term insurance.
Term Insurance plans are more cost-effective if compared to ULIPs. Term insurance plans offer higher sum assured at low premium rates depending on various factors that determines your premium like age, health conditions and so on and so forth. However, it all depends on an individual’s life goal or financial goal when it comes to buying a term plan or a ULIP plan.
3. Surrender Value
Term insurance policy lapses if you do not pay the premium. If a ULIP is surrendered within the lock-in period, the fund value until date is paid out after subtracting applicable charges after completion of lock-in period as per the terms and conditions of the policy. If the ULIP is surrendered after the lock in period, the insurance provider needs to pay out the fund value and there are no surrender charges applicable. Both Term Insurance plans and ULIPs come with their own set of advantages and disadvantages. After looking at the comparison of ULIP vs Term Insurance, you can understand that you cannot call one plan better than the other can. Your needs and aspirations determine which of the two suits you better. If you are looking for investing in debts, equities, then it is better to opt for ULIP as it offers wealth creation opportunity along with protecting your family against unforeseen situations and circumstances of life. However, if you want to secure your loved ones, you could choose a term insurance plan.