How to Select Between ULIP or Term Insurance?

 

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 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.

 

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, on the other hand, does not invest in market funds, but instead provides a specified sum assured upon the death of the life assured.

2. Premiums and Returns

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. Pure term plans do not offer any returns. Under ULIPs, the premium paid is invested in market instruments like equity, debt, liquid, balanced funds, and the returns are subject to market performance. 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 may lapse if you do not pay them due premiums. Under a regular term plan, the life cover benefit will cease and the premiums paid too will not be refunded. If a ULIP is surrendered within the lock-in period, the fund value until date is paid out minus 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 has to pay out the fund value immediately, less applicable charges, if any.

4. Partial Withdrawals

Term insurance plans do not have the feature of partial withdrawals. The entire sum assured will be paid to the beneficiary after the death of the life assured. In case of ULIPs, partial withdrawals are permitted after the lock-in period ends. Check with your insurer, for more details on the applicable charges, if any, for the same.

After looking at the comparison of ULIP vs Term Insurance, you can understand that you cannot call one plan better than the other. Your needs and aspirations determine which of the two suits you better. If you are looking for investing in market-linked instruments like equities, debts, then you can consider ULIP as it offers wealth creation opportunity. However, if you want to secure your loved ones with a high sum assured at affordable premiums, you can choose a term insurance plan.

 

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, 1961¹. 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 met².

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.

Reference

1. https://incometaxindia.gov.in/tutorials/20.%20tax%20benefits%20due%20to%20health%20insurance.pdf

2. https://www.taxmann.com/post/blog/taxation-of-life-insurance-policies-section-10-10d/

BJAZ-WEB-EC-06851/24