Difference between ULIPs and Term Protection Plans

Term Protection Plans are regular Insurance Policies whereas ULIPs are investment schemes along with life insurance cover. Other than the basic difference, there are some variations in the way the premiums and sum assured are dealt with in both the schemes.

Term Protection Plans

Term Insurance Planis a simple insurance policy that provides insurance cover and financial security to the family members or nominees in case of death of the insurer. Coverage is available until end of policy term be it 10, 20 or 30 years.

Premiums are paid annually for the entire term and the policy coverage ends when payment is stopped. There is no monetary payment at the end of the policy term. In other words, term plans provide only death benefit without any investment advantage. All money paid will go as premium only towards covering life of the insured.

The following are the features of Term protection plans:

• The policyholder gets to decide the sum assured or the amount he or his family can get on the event of his death. Generally, sum assured is 10 to 15 times the annual income plus any loans or debts.
• It is a pure death benefit plan only. The insurance company pays the sum assured to the nominee only in the event of death. If the insured person lives more than the tenure of the plan, there are no returns or maturity benefit.
• From tax saving perspective, the premium paid is eligible for tax deductions under section 80 C. The sum assured of term insurance plans are also completely exempted from tax.

ULIPs

ULIPs or United Linked Term Plans are a combination of investment plans and insurance policies. A part of the premium of an ULIP is taken as mortality charges, allocation charges and so on. The rest of the can be invested in various instruments like equity funds, debt funds, balanced funds and other money market instruments as per the choice of the investor.

Since it is also a life insurance cover, the sum assured of the policy is paid out to the insurer and on maturity, the Net Asset Value of the investment is paid out.

Advantages of ULIPs

The following are the advantages of ULIPs over regular Term Plans:

Investment Flexibility

With ULIPs, the investor can choose the more of investment as per his profile, risk appetite and financial standing. He can choose equity funds if he is ready to take risks and aims for returns. He can choose debt funds if he wants to play safe and is satisfied with low returns. He can go for hybrid funds if he wants to take up moderate risks with moderate returns.

Fund Switching

With ULIPs, not only you have the option of choosing the fund you want to invest in, but you have also have the facility to transfer or switch funds between the various options available due to any financial constraints.

There are no tax implications if you choose to switch funds for your ULIP investment. A fixed number of switches are free which varies from one policy to another. The switching is possible during the policy tenure. A fixed number of changes are permitted within the period and a nominal fee is charged for each switch between investments.

Advantages of Term Protection Plans

The following are the benefits of Term Insurance Plans over ULIPs:

Death Benefit

Term Insurance Plans provide coverage against possibly the biggest loss, that is death. The policy ensures that the family members of the deceased are taken care of financially and hence is a wise investment choice.

Low Premium

Term Insurance Plans are simple insurance plans without any frills attached. This simple policy assures peace of mind and a financial safety net for your family and loved ones. A basic policy has a low premium when compared to the sum assured. A policy with attached riders carries a slightly higher premium amount.

Locked Premium

As soon as you buy a Term Insurance Plan, the amount of premium paid is frozen for the rest of the policy tenure. Hence it is advisable to buy a term plan earlier than later to reap the maximum rewards. For instance, if you buy a Term plan with 50 lakh cover and monthly premium of Rs.386, you will have to keep paying this amount throughout the policy tenure.

Key Differences between Term Protection Plans and ULIPs

Point of Comparison

Term Insurance

ULIP

Product Type

Insurance

Insurance and Investment

Tax-Saving

Tax deduction under section 80 C is available. Sum assured is also tax-free under section 80 D.

Tax deduction under section 80 C is available.

Investment

None

Investment in equity, debt funds etc.

Insurance

Pure Insurance policy

Only part of premium paid as charges, rest invested

Returns

No investment means no returns. But sum assured is paid out on death of policyholder.

Returns depend on the funds allocated and market scenario.

Charges

No charges except premium

Fund allocation charge, fund management charge, switching fee, administration fee and so on.

Term

Long-term policy

Long-term investment

Lock-in period

None, policy needs to be renewed each year.

Lock-in period of 3 to 5 years

Security of money

Very safe

Moderately safe

Term insurance and ULIPs are meant to solve different purposes. The investor must wisely choose either of the schemes depending on his needs, financial background, age and investment objective.

I am a free lance writer who mainly cover finance related topics like investment, Tax, Insurance and mutual funds.