Term Plans vs ULIP Plans

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.

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 financial coverage for a specified period. The policyholder has the option of deciding the policy tenure. Term Insurance is a kind of life insurance where the premium paid is used to provide life cover for the life assured. The sum assured is paid out on death of the life assured. A regular term insurance plan does not come with any maturity benefit. However, there are term plans with return of premium that provide a maturity benefit in case the life assured survives the policy tenure. Term insurance might seem to be an affordable insurance plan as it offers lower premium rates along with a high sum assured as compared to other life insurance plans.

Features of Unit Linked Insurance Plans (ULIPs) 

Here are a few key features of Unit Linked Insurance Plans (ULIPs):

Dual Benefit

ULIPs offer the combined advantage of life insurance coverage and market-linked investment opportunities. This means your family is financially protected, while your money grows through investments in various market-linked funds, ensuring a balanced approach to financial planning.

Investment Options

ULIPs allow investment in equity, debt, or hybrid funds depending on your risk appetite and goals. You can select from various fund types based on market outlook and personal preferences, helping you build wealth while enjoying insurance protection.

Flexibility

You can easily switch between different ULIP fund options to suit your evolving financial goals and market conditions. This flexibility empowers you to make timely investment decisions and manage your portfolio efficiently without exiting the policy.

Transparency

ULIPs offer clear information about fund performance, applicable charges, and investment value. This enables policyholders to make informed decisions and track their investments regularly, ensuring a transparent and well-managed financial plan.

Lock-in Period

ULIPs come with a mandatory five-year lock-in period during which funds cannot be withdrawn. This helps build financial discipline and encourages long-term wealth creation through consistent investment.

Partial Withdrawal

After completing the lock-in period, ULIPs allow partial withdrawals to meet emergency financial needs. This feature offers liquidity while ensuring the remaining investment continues to grow.

Tax Benefits

Premiums paid toward ULIPs are eligible for deductions up to ₹1.5 lakhs under Section 80C under old tax regime. Additionally, maturity proceeds are tax-free under Section 10(10D), subject to conditions, making ULIPs a tax-efficient investment choice.

Mortality Charges

A portion of the premium in ULIPs goes toward mortality charges, which fund the life insurance  component of the plan. This ensures your family’s financial protection in case of an untimely event.

Market-Linked Returns

ULIPs invest in market-linked instruments, offering growth potential aligned with market performance. This enables higher returns compared to traditional insurance policies, especially when invested for a long term.

Premium Allocation Charges

These charges are deducted directly from your premium. This means that before your ULIP premium is split between the insurance cover and the investment component, a portion is taken out as premium allocation charges. These charges cover the costs incurred by the insurer for underwriting and distributing the policy to you.

Features of Term Insurance Plan

Here are a few key features of the Term Insurance Plans:

Pure Protection

Term insurance plans are designed purely for life coverage without any savings or investment component. They ensure financial protection for your loved ones in case of an unfortunate event, offering peace of mind and long-term security.

Affordability

Term plans offer extensive life coverage at comparatively low premiums, making them highly cost-effective. This allows individuals to secure their family’s future without putting too much strain on their current finances, making it ideal for budget-conscious policyholders.

Death Benefit

If the policyholder passes away during the policy term, the nominee receives a lump sum death benefit. This amount provides essential financial support to the family, helping them manage expenses and maintain their lifestyle after the loss of income.

Flexible Policy Terms

You can customise your term insurance plan by selecting the policy duration that aligns with your financial goals and responsibilities. Whether for 10, 20, or 40 years, the flexibility ensures the plan supports you through different life stages.

No Maturity Benefits

Unlike endowment or investment-linked policies, term insurance offers no payout if the policyholder survives the term. It’s designed purely for risk coverage, focusing on securing dependents rather than offering savings or returns.

Riders for Additional Coverage

Term plans allow you to add riders like critical illness, accidental death, or disability benefits. These optional add-ons enhance the base policy by offering extra protection tailored to your specific needs at a nominal additional cost.

Tax Benefits

Premiums paid for term insurance qualify for deductions up to ₹1.5 lakhs under Section 80C under old tax regime. Additionally, the death benefit is exempt from tax under Section 10(10D) subject to certain conditions, offering significant tax savings along with life cover.

Simplicity

Term plans are simple to understand and manage. With no investment jargon or complex fund structures, they clearly focus on life protection, ensuring families have financial support during life’s most difficult moments.

Easy Claim Process

Many insurers, offer quick and simplified claim settlement processes. This ensures the nominee receives the payout with minimal paperwork and delay, providing timely financial support when it matters most.

Online Accessibility

Term plans can be conveniently purchased online, enabling quick comparisons, easy premium payments, and faster policy issuance. This digital access simplifies the entire insurance journey, making it user-friendly and efficient.

ULIP vs. Term Insurance – Comparing the Key Parameters

Conclusion

Term insurance plans are pure form of life insurance plans, which pay out a specified sum assured to your loved ones in case of your premature demise. ULIPs, however are investment oriented life insurance plans that invest your premiums in market-linked funds, alongside offering a life cover.

Thus, you cannot compare both the plans with each other. There is no one plan fits all. Determine your financial and life goals, to understand which plan suits you best.

FAQs

1.Which is better, Unit Linked Insurance Plans or Term Insurance Plans?

Both plans have their advantages and cannot be compared with one another as the very purpose for opting for each plan is completely different. Term Insurance is a pure protection plan, whereas ULIPs have an element of investment along with coverage.

 

2.Can you cash in on a term life insurance policy?

Most term insurance plans (except the return of premium plans) do not have any maturity benefit. They are mainly designed to cover the risk of a premature demise. Such plans, thus, have no cash benefit. If you surrender the policy before the completion of the tenure, you will not get any benefit. However, the return of premium term plans has a savings element and might give a cash value upon surrender.

 

3.    Is ULIP tax-free?

The premium paid for a ULIP is tax-free under Section 80C up to Rs.1.5 lakhs and subject to certain conditions prescribed under Income Tax Act, 1961. The death benefit is always tax-free in the hands of the nominee. However, when it comes to maturity benefits, you can claim a tax exemption on the benefits under Section 10(10D) provided specified terms and conditions are met.

 

4.What are the benefits of ULIPs? 

The benefits of ULIPs are as follows –

• They help you to earn market-linked returns on investments.
• The insurance cover gives financial protection against the risk of a premature demise.
• You can make partial withdrawals from the 6th policy year and enjoy liquidity, subject to policy terms & conditions.
• Switching and premium redirection features are available to help you change between investment funds.
• You can pay additional premiums through top-ups.
• There are different types of ULIPs to choose from depending on your needs and requirements.

5.Are returns earned via life insurance tax-free?

Some maturity and survival benefits received from life insurance plans are tax-free. They form a part of maturity benefit and enjoy tax exemption under Section 10(10D) of the Income Tax Act, 1961, provided specified conditions are fulfilled².

6.Is a ULIP plan better than term insurance?

ULIP and term insurance serve different purposes. A term plan is ideal if your goal is pure life coverage at a low cost. It offers financial protection to your family in case of your absence. A ULIP, on the other hand, provides life cover plus market-linked investment options, helping you build wealth over the long term. Choose ULIP if you want investment + insurance, or term insurance if your priority is affordable protection.

7.Is ULIP maturity tax-free?

ULIP maturity proceeds may or may not be tax-free, depending on specific conditions. If the annual premium exceeds ₹2.5 lakh (for policies issued after Feb 1, 2021) or if the policy is not meeting Section 10(10D) conditions (irrespective of premium amount), maturity is taxed as long-term capital gains (LTCG) at 12.5% on gains above ₹1.25 lakh. However, if the maturity proceeds are received on the policyholder’s death, they remain fully tax-exempt. Always check the latest tax rules or consult a financial advisor for clarity based on your policy details.