Term Insurance vs ULIPs: Which One Should I Opt for?

Investments can serve as a supplementary source of income. While some investors are selective with their investment decisions, some others believe in a diverse investment portfolio that will weather any storm. A long-standing debate among investors is whether one should choose a term insurance plan or a ULIP (Unit Linked Insurance Plans).

A term plan is a pure life insurance policy, whereas ULIPs combine both investment and insurance. While at surface level ULIPs might seem like a better choice, when it comes to financially securing your family, a superior choice is a smart term plan that is sensitive to your family’s future protection  needs. The various term insurance benefits are what makes opting for them, a popular choice. However, before choosing one over the other, it is important to know what each of them entails.

What is Term Insurance?

While choosing your investments, the primary consideration is the future financial security. When you design an elaborate financial plan, it is marked with milestones such as buying a car, a house, going on a high-end vacation, saving for the higher education of your child, saving up for that dream post-retirement farmhouse, etc. However, what becomes of your financial plans in the unfortunate event of something happening to you?

This is when term insurance comes into picture. Aside from providing a death benefit for your family to continue living comfortably, a smart term plan also takes into consideration your financial aspirations. Whether it is coverage for liabilities such as a home loan or paying for your child’s foreign education at their dream university or providing for your spouse’s post-retirement needs, a smart term plan will help the family continue achieving their dreams and maintaining their standard of living, even after the policyholder’s untimely demise.

To avail of term insurance benefits, the policyholder has to pay a premium amount to the insurance provider for the duration of the term. The premium is decided based on the age and health of the insurance seeker. If the policyholder passes away during the policy term, the nominees are paid a death benefit. Flexibility and customisation are amongst the best term insurance benefits that enable an insurance seeker to choose the coverage amount that they desire.

As a cost-saving tip, it is recommended to buy online term insurance as it is cheap and allows you to avail multiple discounts on the premiums. Additionally, the earlier you buy term insurance, the better it is, because the premium is cheaper when you are in your 20s than when you buy a term insurance at age 60. The best term insurance policy is one that is considerate of your financial requirements and incorporates your specific coverage needs.     

What is a ULIP?

A ULIP is a two-in-one plan that entices investors with dual benefits. Not only do ULIPs provide the policyholder with a life cover but also open up an investment avenue that is potential of wealth creation. The premium paid towards a ULIP is split into two parts: one part goes towards insurance whereas the other is invested in market-linked returns. The funds that one can in invest in, are :

· Equity funds: Under this ULIP, most of the funds are invested in equity-oriented assets such as company stocks. 

· Debt funds: Here, the funds are invested in debt and market instruments, government securities, and bonds. 

· Combination of both funds: As the name suggests, under this ULIP the funds are invested in a combination of equity and debt funds.

The above-mentioned ULIP investments are made based on the risk profile of an individual. Individuals who can make high-risk investments generally go for equity funds, whereas those who prefer safer investments, go for debt funds. Combination funds are chosen by those with a medium-risk profile. One of the optional benefits of ULIPs is that the policyholder does not have to manage the investments as they are looked after by the company’s fund managers.

ULIPs vs Term Insurance

Insurance, investment, and savings are essential components of any sound financial plan. When it comes to efficient financial planning, it is often recommended to not mix these elements. Acknowledging that every financial product comes with its benefits and drawbacks, investors must analyse the features of each, for clarity of thought before making any purchases.

ULIPs vs term insurance is one such financial debate that aims to objectively weigh the benefits of a pure protection plan and an investment component. Both these instruments are popular insurance products; however, the choice depends on your specific insurance needs. If you need an easy to understand, pure and extensive insurance coverage at affordable premiums, you can opt for a term insurance plan. ULIPs are ideal if you wish to avail the dual benefits of life cover with market-linked investments.

The table below captures and compares the features of both these financial products to help you make a sound financial decision:

 

ULIP	Term Insurance
It provides life cover while enabling  opportunities for wealth creation	It is a pure insurance product
A part of the premium is invested in market- related returns such as equity and debt or a   combination of both	The premiums are only meant to provide a life cover to the policyholder, and sometimes to their spouse as well
Recommended for individuals looking for long-term investment along with an insurance element	Recommended for individuals looking to secure their families and loved ones against unpleasant financial eventualities
As it is a market-linked investment, the returns depend on the type of funds chosen and the existing market conditions	Regular term insurance plans do not offer any maturity benefits. However, you can opt for a term plan with return of premium to get the sum of all premiums paid as a maturity payout.
The policyholder has to pay for several charges such as payment for premium allocation, mortality charges, policy administration charges, fund management charges, etc.	It only includes mortality charges, which is a minimal cost
You can choose a ULIP policy based on your investment needs and financial goals	A term plan can be customised and strengthened with riders
As it is a long-term investment, ULIPs come with a 5-year lock-in period	The term plan does not have a lock-in period. The policyholder has to pay the premiums until the term is active or until their demise.

 

 

The Edelweiss Life term insurance is a comprehensive cover that secures your loved ones against unpleasant eventualities. It has a host of innovative solutions that are both flexible and customisable to help insurance seekers find their perfect life cover.

You can also check out the Edelweiss Life ULIPs that give you a choice of funds based on your risk profile and financial goals. You can either opt for a Self-Managed Portfolio or an Expert Managed one, based on your specific needs.

To conclude

Despite the conflicting opinions, both financial products serve a different purpose. While one protects the family from the financial burden of untimely death, the other enables wealth building to attain financial goals.

The best term insurance policy provides comprehensive financial cover and ULIPs secure your financial future. Each product offers a few more unique benefits that cater to a specific financial goal. The choice rests on you, the policyholder, to identify your needs, assess the plans and choose the one that best suits your requirements.

 

Aastha Mestry - Portfolio Manager

An Author and a Full Time Portfolio Manager, Aastha has 6 years of experience working in the Insurance Industry with businesses globally. With a profound interest for travelling, Aastha also loves to blog in her free time.