Difference Between Term Plans and ULIPs

By siliconindia  |  Wednesday, 07 July 2021, 04:59:55 PM IST

Difference Between Term Plans and ULIPs

If you are an adult in your 20s, you might have heard about the importance of life insurance from your elders or peers. Life insurance is a financial product that helps you and your family remain financially secure in the face of unforeseen events such as the demise of a loved one, the diagnosis of a critical ailment, or an accident. There are various types of life insurance products, each having its unique set of features and benefits.

However, most first-time buyers get confused between some of the primary types of life insurance products. In this article, we will differentiate between online term plans and Unit Linked Insurance Plans (ULIPs) to help you make an informed choice.

What is a term plan, and how does it work?

A term insurance is the simplestlife insurance product. It provides its buyers (called policyholders) high insurance coverage at low rates, compared to other life insurance products. A term life plan gives the beneficiaries (family members) of a policyholder a monetary death benefit on his/her unfortunate demise. All the policyholder has to do is pay a monthly, semi-annual, or annual sum called premium for receiving financial support. All term insurance plans in Indiaoffer this base death benefit. However, different term insurance plans offer varying and additional benefits, depending on the insurer.

Who can buy term insurance?

Any individual between the ages of 18 years to 65 years can buy term insurance. Ideally, term plans are meant to cover the needs of married individuals and their family. However, even single persons can get term insurance as it will be of use at later stages of their life. As the payout at the end of a term plan can support your family’s finances in your absence, it is wise to buy it early in life. Some term plans also provide healthcare benefits, such as a critical illness cover.

Thus, for anyone who wants an affordable life cover with pure life protection, a term insurance plan is the right option. It offers a no-frills-attached life cover and assures optimum protection to your family in case of any eventualities.

What is a ULIP plan,and how does it work?

Unlike term life plans, ULIPs offer the policyholder the dual benefit of increasing his/her wealth and getting life insurance protection. With it, a policyholder can invest and grow his wealth and keep his/her family members secured at the same time. The investment is carried out (either by the policyholder itself or the insurer) with the premiums paid by the policyholder to avail of the ULIP plan. The premiums are invested in equity, debt or hybrid investment markets and depending on the market’s performance, the policyholder gets profits/returns or faces losses. ULIPs generate higher returns than term plans;however, as they are linked to the market, they carry a higher level of risk. The insurance coverage is given to the policyholder irrespective of the returns generated.

Who can buy a ULIP?

Any individual between the ages of 18 years to 70 years can buy a ULIP. However, in ULIPs, the person who buys the policy can be different from the life he/she is insuring (called the life insured). The minimum age for the life insured can be 0 years and can go up to around 60 years, depending on the insurer.

A ULIP is the perfect financial instrument for someone who wants both investment and insurance through a single plan. However, the premiums for ULIPs are higher than term plans. Also, after Budget 2021, the maturity payouts from a ULIP will invite a long-term capital gains tax if the total annual premium exceeds ?2.5 lakhs.

Summary of differences between a term life plan and ULIP:

Parameter

Term life plan

ULIP

Product goal

Life insurance protection

Wealth creation through investment + life insurance protection

Term/duration

10-40 years (can go up to 100 years of age with some providers)

10-30 years

Lock-in period

None

5 years

Investment risk attached

None

Mid-level to high-risk attached

Nature and rate of returns

Fixed and guaranteed sum assured on death of the policyholder.

No maturity/survival benefit to the policyholder.

The returns depend on the performance of the asset and vary as per market fluctuations. The return rate is generally between 7-16%

Withdrawal options

You cannot withdraw any sum from a term insurance plan. The term plan only offers pure life cover with no investment/savings.

You can make partial withdrawals after the lock-in period of 5 years.

Tax benefits

You get a term insurance tax benefit on the premiums paid, provided they are up to 1,50,000 per year according to Section 80C of the Income Tax Act, 1961. 

The death benefits are also exempt from taxation according to Section 10 (10D) of the act.

You get tax benefits on the premiums paid, provided they are up to 1,50,000 per year.  The death benefits are also exempt from tax deductions.

The maturity payouts are taxed as long-term capital gains if the annual premium is more than 2.5 lakhs.

 

What are the features of a good term plan?

Many offline and online term plans can qualify as the best term insurance in India. The leading term plans offer:

  • Affordable premiums
  • Extensive life cover
  • Tax benefits on premium paid and death benefit
  • Option to waive off premiums in case of specified eventualities
  • Host of attractive riders, like critical illness rider, accidental death benefits rider, etc., to choose from
  • Lump-sum payout with critical illness rider on diagnosis
  • Flexible premium payment options and death benefit payout options

To sum it up:

Term insurance and ULIPs are financial instruments needed to keep your loved ones safe and secure during tough times. However, before you buy one, it is vital to compare term insurance plans to learn which one suits your needs best.

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