What is the difference between ULIP and Term Plan?
Life pays well to those who pay heed to it very well. Isn’t this a fact?
If you are unwise and spend a lot of money, probably you will not be left with plenty of it in future. But on the other hand, if you make expenses in a planned manner, fulfil your desires, and create wealth, you will be in a better place.
Being mindful before planning the investment is crucial because it is your hard-earned money that you will invest. Second, the returns on investment depend not on your command but are directly proportional to the type of instrument you put your money into. Some of the most popular ways to plan your savings and get insurance cover include buying a term plan or a ULIP. You can create wealth for yourself by diversifying your investment portfolio. But why diversify?
If you put all the eggs in one basket, there are high chances all of them will get stale and rotten. There is no rocket science in simple logic. Hence, it is essential to understand the difference between a ULIP and a term plan. Before that, let us see what the plans and their relevance in savings are.
What is a Term Plan?
A Term Plan is a life insurance policy that allows any individual to save money at an affordable premium. The policy provides life cover to the policyholder. It implies that if the policyholder passes away during the term of the procedure, the beneficiaries get the sum assured as specified in the policy.
The condition applies only when the policy is in continuation and the premiums are paid to date. It is the best way to save money for the family when you know that they require money to manage the finances.
The term plan does not pay anything after the policy’s maturity and if the policyholder survives the period. It raised concern in the buyers for the term plan for which the insurance companies introduced an alternative of Return of Premium option.
Under this type, the policyholder gets the entire premium paid if they survive the policy period. Therefore, the premium for this alternative is higher than the standard version of the policy.
In any case, the maximum benefit that anyone can draw under the term plan was the sum assured. But when humans think of savings, they think to get more. This could be answered with the ULIP plans. So let us now look at what is a ULIP plan?
What is a ULIP Plan?
A ULIP is a unit-linked insurance policy that has its benefit associated with the market returns. ULIPs work on the principle of providing a life cover along with creating a corpus of money.
ULIP works on the principle of investing a portion of the premium into the shared pool. These pools are called funds that include equity, debt, or combined funds. The rate of return is directly dependent on the market risk. You can purchase a ULIP after evaluating your risk-absorption capacity, the premium paying capacity and the convenience factor.
When making an investment, you would like all individual products either because of lack of knowledge, or you may want to make quick money. But the real benefit can be reaped from the investment plans which help you meet future goals. Now, if you are confused, you are on the right path; as Larry Leissner once said, “If confusion is the first step to knowledge, I must be a genius.”
It is okay to be perplexed before making investment decisions as one it is your money and not your neighbours’. Second, you are looking for returns for future goals that you own and no one else. Anyways, you can read further to compare ULIP and Term plan and make a decision.
What is the difference between the Term Plan and a ULIP Plan?
Here is how you can compare ULIP and Term Plan:
|Particulars||Term Plan||ULIP Plan|
|Coverage||The term plan provides coverage to the nominee in case of the policyholder’s demise.||A ULIP plan is a life cover plus investment plan that gives the policyholder an option to create a huge volume of wealth.|
|Affordability||Term plan is cost-effective as it gives only the life cover||ULIP plan is comparatively expensive as it comes with an option to make investment.|
|Maturity Benefit||The Term plan comes with a pure death benefit and no savings component.||ULIP plan has a considerable portion of savings component as the portion of your premium is further invested into different market-linked funds.|
|Lock-in period||A Term Plan has no effect or no lock-in period.||A ULIP has a 5 year lock-in period which indicates that you cannot withdraw the money invested during this period.|
|Premium||Premium remains constant for the year and as applicable depending on the age.||On the other hand, in ULIPs the investment can be made depending on the changing risk-appetite of the policyholder.|
|Returns||The nominee gets the sum assured after the policyholder’s demise during the policy term. No returns and only death benefit.||You get higher returns for the time you stay invested. In case of the death of the policyholder, the nominee gets the sum assured.|
|Charges||No charges for buying a term plan.||You have to pay various charges like fund management, agent fees, administration charges, fund switching, and allocation charges.|
Common Benefits of the Term Plan and ULIP Plans.
- Both the Term plan and a ULIP plan provides a life cover to the policyholder for the sum assured chosen.
- With these two types of plans, you get income tax deduction benefits under section 80 C of Income Tax Act, 1961.
Which one is better for you: ULIP Vs Term Life Insurance?
Both the policies ideally serve different purposes and help solve the financial crunch of the family when the policyholder is not there to take care of the expenses. With a term plan, your family can continue to maintain the standard of living and pay the debts easily. Whereas, with a ULIP plan you can create a corpus of wealth when you invest for a period of 10 to 15 years.
Whether a term plan or a ULIP plan, you must make the investment only after considering your premium paying capacity and the benefit you will get.
Raj Kumar is a qualified business/finance writer expert in investment, debt, credit cards, Passive income, financial updates. He advises in his blog finance clap.