Term Insurance vs. ULIP - Which One Should You Choose?

24-June-2021 |

Life insurance is a product aimed to secure your and your family’s future financially. With various life insurance products being offered that cater to the different needs of policyholders, each of them has its share of pros and cons. When it comes to choosing the right life insurance product, the decision may certainly not be a cakewalk for everyone. Let alone other complex products that tend to require a financial expert’s assistance, even a product as simple as term insurance creates a dilemma in people’s minds. This is especially true when drawing comparisons with more contemporary and complex insurance instruments, such as ULIPs. As this ends up adding to the confusion individuals already face, here are the key aspects one needs to know about term policy and ULIPs. This will help you clear your mind and make an informed decision.

What is Term Insurance?

As the name suggests, a term insurance policy provides life insurance cover for a specific period chosen by the policyholder. The primary aim of term insurance is to cover the nominees’ financial future in the event of the policyholder’s untimely demise during the policy tenure. A term policy is a simple and plain insurance plan, and its premium is highly affordable, even considering the large cover amount it can provide. However, remember that the life insurance term plan lapses if the policyholder fails to pay the premium, even after the grace period allowed by most insurers past the premium payment due date.

Key Features of Term Insurance

  • The policy offers insurance cover in the form of death benefits to the nominees/beneficiaries upon the policyholder’s untimely demise during the policy tenure.

  • For a higher degree of flexibility in term insurance, some insurers tend to offer maturity benefits as well in the form of the return of premium cover benefit. Through this benefit, the insurer repays the premiums paid towards the policy if the policyholder survives the term.

  • Not only does the policyholder pay fixed premiums throughout the entire tenure of a term policy, but also the premium paid is highly affordable and probably the lowest amongst various life insurance plans, especially for large covers.

  • Another key benefit that often acts as an impetus for many people to purchase term insurance is the tax* benefits. Tax* deductions can be claimed on the premiums paid towards the term policy under Section 80C of the Income Tax Act.

  • Moreover, even the death benefits received by nominees or maturity benefits received by the policyholder are completely tax*-free.

What are ULIPs?

Unit Linked Insurance Plans (ULIPS) are another type of life insurance that provides the twin benefits of life cover and serves as an investment avenue for the policyholder. One part of the ULIP premium paid by the policyholder is used as mortality charges to offer the benefit of insurance cover, while the other part is used to invest in options like debts, bonds, equities, hybrid funds, etc. During payout on the maturity of a ULIP, the policyholder is entitled to receive the sum assured and/or the fund value of the unit-linked investments made by the insurer on the policyholder’s behalf.

Key Features of ULIPs

  • ULIP offers dual benefits in the form of life insurance cover and wealth creation through investment, all under a single plan of ULIP.

  • The policyholder has the freedom to choose the investment avenue, depending on his/her risk appetite. He/she can choose whether to invest in debt funds, equity-oriented funds, or a combination of these.

  • ULIPs also tend to allow policyholders the portfolio flexibility to switch funds for a better market return on investments or due to a change in risk appetite.

  • Generally, it is advisable to invest for the long term if availing ULIPs to yield reasonably high market returns.

  • ULIP plans have a lock-in period of 5 years.

  • As far as tax* benefits are concerned, the premiums paid on ULIPs are eligible for deductions under Section 80C of the Income Tax Act.

  • 1st February 2021 onwards, the maturity proceeds of ULIPs with an annual premium of more than ₹ 2.5 lakh will be taxed at the same level as equity-linked mutual fund schemes.

Key Differences to Remember when Comparing ULIPs and Term Insurance

Basis

Term Insurance

ULIP

Nature of product

A simple and pure form of life insurance offering financial security through the large cover.

Twin benefits of life insurance cover and wealth creation through investment.

Premium Affordability

Probably the most affordable life insurance. Usually offers huge cover at low and affordable premiums.

Tend to involve slightly higher premiums due to the investment component in the portfolio.

Lock-in period

None

Five years.

Suitability

Hedging the risk of life’s uncertainties through huge insurance cover.

Opt for long-term savings towards financial goals along with insurance cover for financial security.

Investment Flexibility

None. Only the flexibility to opt for maturity benefit apart from the death benefit.

Wide range of investment options, such as debts, equities, etc., and flexibility of portfolio switch as per risk appetite and instrument performance.

 

Choosing ULIP vs. Term Insurance - The Decision

 

The information shared above must have given you a fairly clear idea regarding the features and differences between ULIPs and term insurance. Both have their unique set of benefits, making them lucrative products. After comparing these insurance products, the decision of selecting one depends on an individual’s preferences and financial needs. Term insurance policies are the most risk-free and the simplest way to financially secure the future of your loved ones in the event of your untimely demise. And this is possible at low premiums for a high sum assured. On the other hand, ULIPs offer twin benefits of life insurance cover and investment. Tata AIA Life Insurance not only offers a wide range of term insurance plans but also ULIPs with a range of riders# to choose from.

Since these products tend to serve different purposes, adding both to your financial portfolio instead of choosing between them can help secure your family’s financial future and build wealth for the long term. Hence, it is wise to supplement your term plan with a ULIP or vice versa. Those who wish to take only one of these should factor in all the features, benefits, and differences between these products mentioned above and then select the product that suits them the most financially.

 


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Disclaimer
  • Insurance cover is available under the product.

  • The products are underwritten by Tata AIA Life Insurance Company Ltd.

  • The plans are not a guaranteed issuance plan, and it will be subject to Company’s underwriting and acceptance.

  • For more details on risk factors, terms and conditions please read sales brochure carefully before concluding a sale.

  • This blog is for information and illustrative purposes only and does not purport to any financial or investment services and do not offer or form part of any offer or recommendation. The information is not and should not be regarded as investment advice or as a recommendation regarding any particular security or course of action.

  • Please know the associated risks and the applicable charges, from your Insurance agent or the Intermediary or policy document issued by the insurance company.

  • Every effort is made to ensure that all information contained in this blog is accurate at the date of publication, however, the Tata AIA Life shall not have any liability for any damages of any kind (including but not limited to errors and omissions) whatsoever relating to this material.

  • *Income Tax benefits would be available as per the prevailing income tax laws, subject to fulfilment of conditions stipulated therein. Income Tax laws are subject to change from time to time. Tata AIA Life Insurance Company Ltd. does not assume responsibility on tax implications mentioned anywhere in this document. Please consult your own tax consultant to know the tax benefits available to you.

  • #Riders are not mandatory and are available for a nominal extra cost. For more details on the benefits, premiums and exclusions under the riders please refer to the Rider Brochure or contact our Insurance Advisor or visit our nearest branch office.

  • IN THIS POLICY, THE INVESTMENT RISK IN INVESTMENT PORTFOLIO IS BORNE BY THE POLICYHOLDER

  • THE LINKED INSURANCE PRODUCT DO NOT OFFER ANY LIQUIDITY DURING THE FIRST FIVE YEARS OF THE CONTRACT. THE POLICY HOLDER WILL NOT BE ABLE TO SURRENDER/WITHDRAW THE MONIES INVESTED IN LINKED INSURANCE PRODUCTS COMPLETELY OR PARTIALLY TILL THE END OF THE FIFTH YEAR.

  • Past performance is not indicative of future performance.

  • All investments made by the Company are subject to market risks. The Company does not guarantee any assured returns. The investment income and price may go down as well as up depending on several factors influencing the market.

  • Please make your own independent decision after consulting your financial or other professional advisor.