Having a life cover is a priority for most people, especially those who are primary breadwinners for their families. But while you secure your family’s future, you may also want to work towards building your wealth, so your collective and individual goals can be achieved.
Life insurance vs wealth creation should not have to be a tough choice. While using your resources wisely and prioritising is important so as to not burn a hole in your pocket and stay on track, there are options that allow you to make a wise choice. Plans like ULIP offer the two-pronged advantage – investment plus insurance – in a single policy.
But these plans may be too expensive for some people, or too complicated for others. For consumers who prefer to keep it simple, term insurance plans may be the choice. If you are unable to make a choice between the two options or are unsure whether you are making the right one, it may help to understand the differences between the two.
Let’s take a look at what a ULIP is, what a term plan is, and which of these can be right for you.
Term Insurance
A term life plan offers a financial safety net for your loved ones in the event of your untimely passing. It is known to be one of the simplest, most affordable, and no-frills life insurance plans.
Apart from death benefits, these plans can also be enhanced with riders. These are add-on features that will allow you a choice of benefits. Depending on your plan type and insurance provider, these may include:
- Premium Waiver
- Accidental Death
- Accidental Total/Partial Permanent Disability
- Critical Illness
- Family Income
There are various sub-types of these plans, such as TROPs or moneyback plans, increasing term plans, decreasing term plans, and convertible plans. Level term plans are the fundamental version of these plans and offer the basic features at low costs. You can choose a term insurance as per your needs and expectations.
Unit-linked Insurance Plans
ULIPs are a way to put your money into a single plan to fulfil two financial goals. What is a ULIP and how does it work?
When you buy a ULIP, online or offline, you will pay premiums as you would do so into an insurance plan. These premiums are divided into two parts to fulfil the two goals – life cover and wealth building. The insurance part affords you a life cover for the duration of the policy.
The other part is directed towards financial instruments, such as bonds, equity shares, and debt funds. While a fund manager oversees these investments, you can also decide the direction your policy takes. The policyholder, depending on their risk appetite, can choose the sort of funds their premium is put into.
A fact to know about ULIPs is that your entire amount is not directed into these two divisions. A part of your premium goes into fees and charges associated with ULIPs, such as administration charges, premium allocation charges, fund management charges, and partial withdrawal charges. According to the recent rules, ULIP charges for the first ten years of the policy duration are to be capped at 2.25%.
Also, when you buy a ULIP online, they tend to be relatively cheaper, as some of these charges are only applicable when making offline purchases. It is essential to be aware of all the expenses that come with a ULIP, and know which ones apply to you.
Differences Between Term Insurance And ULIPs
A direct comparison between term plans and Unit-linked Insurance Plans would not be fair, especially without acknowledging that the two serve different goals, and function differently. Nonetheless, let’s compare the differences between the two to get a better idea of which one is more suitable for you.
| Term Insurance | Unit-linked Insurance Policy |
| · Offers life insurance (Pure insurance) | · Offers life insurance plus wealth building |
| · Financial security net for family and loved ones | · Financial security net as well as investment opportunities for the policyholder |
| · Does not offer investment | · Investment avenues can be chosen by the policyholder as per their risk appetite |
| · Not market-linked | · Market-linked, thus investments prone to fluctuations |
| · No lock-in period | · Lock-in period of five years, after which the policy can be surrendered |
| · No additional charges | · Several additional charges, such as fund management, administration, etc. |
| · No returns (except for return of premium plans) | · Returns can be expected as per market performance |
| · Suitable for consumers looking for low-cost life insurance | · Suitable for consumers who can afford to spend more and hope to earn more |
Conclusion
Once you have acquainted yourself with the details of these plans, their features, benefits, and functions, you will be equipped to make a better choice. However, it is equally important to take stock of your goals, what you seek, and what you can spend at the moment. This will help you arrive at a decision about which plan to avail.
