A good financial plan always includes a good amount of savings, investments, and insurance. Even financial experts say that your portfolio should have the right mix of investments and insurance. Today, you can choose from a wide range of insurance products. The main reason to buy an insurance plan is to protect yourself and your loved ones financially. You can choose between traditional insurance policies, term plans, and unit-linked insurance plans (ULIPs).
It can be hard to decide between term insurance and ULIPs. Here are some basics that may help you make the right choice and understand the difference between ULIP and a term plan and which is better:
Term insurance
Term insurance is pure life covers that pay your beneficiaries the policy benefits if something unfortunate happens to you. There are various term durations for which you can get coverage. However, you will no longer be covered if you stop paying the premium.
In a term insurance policy, there is no way to invest money. Also, many term policies don’t have any benefits when they end. If you live until the end of the policy, you may not get any money back. In case you are no more, your beneficiaries get the death benefits which are tax-free. Under Section 80C, you can also get a tax break on the premium you pay for a term plan based on the tax regime (old/new) chosen by you at the time of tax filing.
Features of term insurance
Some of the things about term insurance are listed below:
- When you are no more, your family will get money from term insurance.
- Different insurers also offer maturity benefits, which add to the product’s flexibility. But you need the ‘return of premium’ rider to get the maturity benefit. It is one of the market’s lesser expensive plans for life insurance. During the policy’s validity, you have to pay fixed premiums.
- The premium paid for term insurance can be used to lower your taxes under the old tax regime. Also, passing away and maturity benefits do not attract taxes.
ULIPs
Unit-linked Insurance Plans (ULIPs) are insurance plans that also let you invest. A portion of the ULIP premium is used for death benefits. The rest is invested in different financial instruments to make money grow in value. The investment part can be put into different things like debt, stocks, and bonds. You can choose how the money is invested.
Features of ULIPs:
Some of the important things about ULIPs are:
- With a ULIP, the policyholder can get life insurance and a way to build up their wealth under a single plan.
- The policyholder has the freedom to choose whether to invest in debt-oriented funds, equity-oriented funds, or a mix of both. If your investments aren’t doing well on the stock market, you can switch funds with a ULIP.
- The IRDAI states that the annual fees for ULIPs are only between 2-2.25%.
- Long-term ULIPs are an excellent way to get high returns from the market.
- The minimum time you have to keep your policy is five years. After that, it’s easy to get your money back.
- Depending on how well the underlying assets do, they can give high or moderate returns.
Other factors
- Atheyordability: In term plans, there are fewer splits because the premium is used to pay for administrative costs and mortality charges. So, term plans are cheaper and offer more coverage for the same money.
On the other hand, part of the premium for ULIPs goes toward these costs, and the rest is invested, so there are more ways to split the money. ULIPs, on the other hand, have higher fees and a higher premium. - Flexibility: When choosing a ULIP, you can invest in different financial instruments based on your risk tolerance and financial goals. You can also switch between funds based on what you need. However, a term plan doesn’t give you this kind of freedom.
- Locked Premium: When you buy a term plan, the premium stays the same for the whole time you have the plan. So, if you buy an insurance policy when you’re young, you can get more coverage for less money. You can also stop the coverage.
ULIPs, on the other hand, have a five-year lock-in period during which the money can’t be taken out.
Conclusion
Now that you know the differences between ULIP and term insurance, a careful look at your needs will help you choose between these two types of life insurance. Keep the tax benefits in mind. These benefits vary based on the plan, the tax regime followed (old/new), and several other factors. You can use a term insurance calculator to help you determine the plan that suits your needs well. It is also easier to compare and make a decision if you try to buy your life insurance online.
