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Ref. No. KLI/22-23/E-BB/492
While term insurance is purely an insurance product, ULIP is a mixture of insurance and investment. Here are some points that will explain why term insurance is better than ULIP.
Summary
Most financial experts suggest buying a term insurance plan over a ULIP. Read on to know why.
Both term insurance and ULIP (Unit Linked Insurance Plan) are popular in India. However, there is a debate on which one is better. This debate is misplaced as term insurance wins hands down. Before getting deeper into the subject, here is an overview of what these products are.
● Term Insurance
Term insurance is life insurance in its purest form. It offers comprehensive financial protection to the family members in case of policyholder’s demise. A term insurance plan does not provide any maturity benefit at the end of the policy if the policyholder survives the policy term.
● ULIP
Unit linked insurance plan, or ULIP, is a combination of insurance and investment. The goal of a ULIP is to provide life cover as well as wealth creation. A portion of the premium amount paid by the policyholder is invested in shares and bonds, and the rest is used for providing insurance cover.
You may find ULIP a better option based on the skeletal definition discussed above. However, the devil lies in the details. Read further to know why term insurance scores more brownie points than ULIP
1. A Cocktail is Not Good
Both term insurance and ULIP are regulated by the Insurance Development Authority of India (IRDAI). This makes them primarily an insurance product, at least on paper. While term insurance is purely an insurance product, ULIP is a mixture of insurance and investment. ULIP practically works like insurance as well as a mutual fund. Financial planners always caution against choosing a product that is a mixture of insurance and investments.
2.Term Insurance is Easy to Understand
Term insurance only covers the policyholder’s life and pays the death benefit to the family when they are no more. Thus, there is no intricate jargon involved. The terms and conditions of term insurance are simple and easy to understand or explain.
ULIPS, being a mixture of insurance and market-linked investment, are not as simple and easy to understand when compared with term insurance.
3.Highly Affordable with High Coverage
Term plans are highly affordable and practically maintainable for an extended period. Since they only come with the death benefit, the premiums are lower, and the entire premium goes towards giving you and your family the death benefit. Since ULIPs also have an investment factor, you get lower cover as compared to term insurance. Also, the premium for ULIPs is higher than term plans.
4.Risk Factor
Term insurance plans provide a fixed life cover that is proportional to the premium paid. This makes it completely risk-free. Thus, it can be an ideal choice for most people, especially to those who don’t have any other life insurance cover. ULIP, on the other hand, actively participates in stock market instruments such as shares and options. Hence, there is no guarantee of return on investments. Therefore, investing in ULIP can be risky when compared to term insurance.
Term Insurance - The Perfect First Insurance Cover You Need
There are no winners or losers when it comes to term insurance and ULIP. However, considering how both works, it is advisable to go for term insurance first. After taking term insurance that adequately covers the long-term financial needs of your family in your absence, you may go for investments in ULIP and other similar products.
Ref. No. KLI/22-23/E-BB/2435
