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Term Plans vs ULIP Plans

When it comes to financial protection, two popular options are term insurance and ULIPs. Term insurance provides pure life coverage for a specific period at affordable premiums, offering a death benefit to your family if something happens to you. ULIPs, on the other hand, combine life insurance with investment opportunities, allowing you to potentially grow your wealth while also having coverage. Both have their unique features and benefits, so understanding the differences can help you choose the right option based on your financial goals and needs.

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Term Plans vs ULIP Plans

Term Insurance OR ULIP

Term Plans vs ULIP Plans
July 15, 2024

Table of Content

 

In this policy, the investment risks in the investment portfolio is borne by the policyholder  

It is always recommended to have backup plans for tough times so that financial crises don’t put you in stress or discomfort.

And when it comes to getting oneself insured, the plethora of options almost makes it overwhelming to choose the right one.

It is important to note that each insurance plan, including the best term insurance plan for 1 crore, comes with its own positives and negatives, offering one main benefit of insurance. The purpose of insurance is to protect your family in unexpected circumstances or situations.

ULIP OR  term insurance often tops our minds when it comes to getting financial coverage for oneself. Today, we’ll discuss ULIP vs term insurance and understand which is better for you.

What Is Term Insurance?

As the name suggests, term insurance provides life cover for a specific period of time. You have the flexibility to choose this term, and it could be anything between 5 years to your entire life. Since these are plain insurance plans, their premiums are highly affordable. However, if you stop paying the annual premium at any point, the policy will end. Additionally, it’s important to note that there is no payout at the end of the term should you outlive the policy. The insurance covers only one risk – death.

Features Of Term Insurance

Let’s discuss the different features or characteristics of term insurance policies, particularly regarding ULIP or term insurance, and also consider how much term insurance do I need for proper financial protection.

Pure protection

Term insurance focuses on providing life insurance coverage for a specific term. It doesn’t allow policyholders to invest further and accumulate wealth for the long term.

Affordability

Best term insurance plan in India provides coverage for a certain period, which is the reason behind low premiums and affordability. It makes it suitable for individuals with low budgets and looking for protection of dependents/families in case of unexpected demise.

Death benefit

It offers a sum assured to the dependents or nominees of the policyholder on his demise. This provides financial planning/protection to the families, allowing them to arrange funds without stress.

Flexible policy terms

You can choose a policy term based on your specific needs or requirements. It also allows you to add riders1  to the policy to enhance its coverage, making it flexible in nature.

No maturity benefits

Term insurance, unlike other plans, does not offer any maturity benefit. It means if you outlive the policy, you won’t be eligible for any benefits and have to renew the policy.

Riders for additional coverage

You have the option to add riders1, such as critical illness riders1, to enhance the coverage of the policy. This may add to the premiums but offers additional coverage, too, at an affordable rate.

Tax benefits

Premium payments are eligible for tax deductions under section 80C of the Income Tax Act. Also, the death benefit is eligible for tax exemption under section 10(10D).

Easy claim process

These plans usually come with an easy and hassle-free claim process. This ensures your loved ones are able to cope with finances in case you pass away.

What Are ULIPs?

ULIPs, or Unit Linked Insurance Plans, provide you with life cover along with an investment avenue. One part of the premium you pay is used as mortality charges to offer you insurance, and the other part is invested in various investment options such as bonds, debts, equities, or a hybrid fund. When it is time to receive the payout upon maturity of the plan, you’ll be entitled to the sum assured and/or the fund value of the unit-linked investments.

Features Of Unit-Linked Insurance Plans

Let’s discuss the different features or characteristics of ULIPs.

Dual benefit

ULIPs usually offer dual benefits of insurance coverage and investment options. Hence, along with getting insurance, you have the opportunity to create wealth under a single plan.

Investment options

Based on your risk appetite, goals and preferences, you have the opportunity to invest in different investment avenues. These avenues can be debt, equity or a mix of both.

Flexibility

There is flexibility in choosing investment options, sum assured and premium payments. Hence, you can make switches based on your goals and income levels.

Transparency

ULIPs offer transparency in the sense that you are made aware of the performance of investments along with charges levied on you. Also, you can ask for the value of investments, sum assured, policy tenure, etc.

Lock-in period

These plans often come with a lock-in period, as certain policies allow you to withdraw after five years. This allows you to stay patient and remain invested to witness long-term benefits.

Partial withdrawals

A few plans may allow partial withdrawals after the completion of the lock-in period. This allows you to arrange funds during emergencies.

Tax benefits

ULIPs offer tax benefits u/s 80C of the Income Tax Benefit. Also, the proceeds may be tax exempted under section 10(10D), making it a great tax-saving tool.

Mortality charges

These mortality charges are calculated by subtracting the death benefit and the current fund value. However, as the policy tenure grows, mortality charges also decrease.

Premium allocation charges

It is the percentage or proportion of the first year’s premium paid that goes towards allocation charges by the insurer before the policy allocates or starts.

ULIP OR Term Insurance: The Benefits  

Now, let’s see the major difference between benefits of term insurance plans & ULIPs and learn about them in more detail.

Parameters

ULIPs

Term Insurance

Offering

ULIPS offer insurance and an opportunity to make investments.  

Term insurance solely offers pure insurance or pure protection.

Investment

Offers an opportunity to invest in market-linked or market funds such as debt, equities or a mix of both.

Does not offer any investment option.

Premium amounts

Comparatively higher due to the investment option involved.

Relatively lower than ULIPs.

Returns

Higher returns due to risk factors involved in investing in funds.

Only offers death benefits.

Lock-in period

Involves a lock-in period of 5 years or so to make you stay invested and generate returns.

No lock-in period is involved in the term insurance.

Switching

It allows you to switch between different funds or types of investments based on market factors.

There's no such option of switching, and it is a simple plan offering death benefits.

Financial returns

High returns due to the high potential of investments.

It focuses on protection and insurance instead of returns.

Tenure

It offers flexible tenure, which may be altered as per your needs, requirements and goals.

The policy tenure is fixed and is determined at the time of purchasing the plan.

Ideal for

It is ideal for individuals seeking insurance and investment benefits under a single plan.

It is ideal for individuals only wishing for the financial protection of their families upon their demise.

Wealth creation

It allows individuals to accumulate wealth and save for their future.

It has nothing to do with wealth creation and offers financial protection only. It takes care of families upon the policyholder’s demise.

Maturity benefits

It offers maturity benefits that are based on how well the investments perform over the lifetime of the policy.

It has no maturity benefit and solely offers a death benefit.

Charges

Fund management charges or administration charges, premium allocation charges, and mortality charges are usually applicable.

Usually involves mortality charges.

Tax benefits

Offers tax benefits on payment of premium amounts and upon receiving payouts or proceeds. These benefits are applicable under sections 80C and 10(10D) of the Income Tax Act.

Offers tax benefits on payment of premium amounts and upon receiving payouts or proceeds. These benefits are applicable under sections 80C and 10(10D) of the Income Tax Act.

 

The Winner?

Term insurance policies are the most risk-free way of securing the future of your loved ones in case something happens to you. They are specifically useful if you are looking to do that at low premiums & for a high sum assured. On the other hand, ULIP policies offer investment opportunities along with life cover.  Term insurance plans, offer maturity benefit & fulfil long-term goals, only because of the returns on investment.

Both policies serve different purposes, & therefore, you should not pick one over the other option. Adding both to your financial portfolio will not only help you in securing the financial future of your family & loved ones but also build a corpus for your retirement & other future needs. That is why it's wise to add your term plan with a ULIP plan, or vice versa. To protect your loved ones, click here. To fulfil all your financial goals, click here.

FAQs

Should I buy ULIP or a term plan?

You should buy a plan that aligns with your goals and objectives. If your goal is to get yourself insured while investing money and creating wealth for the long term, ULIPs are ideal in such cases. However, if you can’t pay high premiums and only want death coverage, term insurance is the right option for you.

What is the difference between ULIP and term plan?

The primary difference between ULIP and term insurance is that ULIP offers dual benefits of investment and insurance. However, term insurance offers pure life insurance coverage. ULIPs offer guaranteed death benefits, while term insurance doesn't guarantee returns on the policy's expiry.

Is ULIP a good investment?

ULIP is a good investment for anyone looking for an option that allows them to invest along with getting themselves insured. It offers decent returns and flexibility and allows you to create wealth over time.

Is ULIP and term insurance the same?

No. ULIP and term insurance are not the same. While both offer life insurance, ULIP offers an extra benefit by allowing policyholders to invest and create wealth over time. Term insurance does not offer any option to save money or invest it further to generate returns.

Which is better: ULIP or mutual funds?

No one investment avenue is better than the other. What makes an investment option the right fit for you is your goals, objectives, risk appetite, income, age, dependents, etc.

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Francis Rodrigues Francis Rodrigues

Francis Rodrigues has a decade long experience in the insurance sector, and as SVP, E-Commerce and Digital Marketing, HDFC Life, manages the online sales channel, as well as digital and performance marketing. He has had hands-on experience in setting up sales channels and functional teams from scratch over a career spanning 2 decades.

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Vishal Subharwal Vishal Subharwal

Vishal Subharwal heads the Strategy, Marketing, E-Commerce, Digital Business & Sustainability initiatives at HDFC Life. He is responsible for crafting and ensuring successful implementation of the overall organisation strategy.

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Term Insurance OR ULIP

Term Insurance OR ULIP

ULIP vs Term Insurance - Which ensures better returns? Explore the features and benefits of each to make an informed decision for your investment portfolio.
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We at HDFC Life are committed to offer innovative products and services that enable individuals live a ‘Life of Pride’. For over two decades we have been providing life insurance plans - protection, pension, savings, investment, annuity and health.

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Disclaimer

1. For all details on Riders, kindly refer to the Rider Brochures available on our website.

Note - Tax benefits are subject to conditions under Sections 80C, 80D, Section 10(10D) and other provisions of the Income Tax Act, 1961.

This material has been prepared for information purposes only and should not be relied on for financial advice. You should consult your own financial advisor for any queries

The Unit Linked Insurance products do not offer any liquidity during the first five years of the contract. The policyholders will not be able to surrender/withdraw the monies invested in Unit Linked Insurance Products completely or partially till the end of fifth year.

HDFC Life Critical Illness Rider (UIN: 101B018V01). For more details on risk factors, associated terms and conditions and exclusions please read sales brochure carefully before concluding a sale.

Unit Linked Life Insurance products are different from the traditional insurance products and are subject to the risk factors. The premium paid in Unit Linked Life Insurance policies are subject to investment risks associated with capital markets and the NAVs of the units may go up or down based on the performance of fund and factors influencing the capital market and the insured is responsible for his/her decisions.

The name of the company, name of the brand and name of the contract does not in any way indicate the quality of the contract, its future prospects or returns. Please know the associated risks and the applicable charges, from your insurance agent or the intermediary or policy document of the insurer. The various funds offered under this contract are the names of the funds and do not in any way indicate the quality of these plans, their future prospects and returns. 

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