If you’re stuck in a situation where you’re thinking, why I should invest in ULIP or which one should I buy – term insurance or ULIP? You have come to the right place. In this article, we will tell you the difference between the two and help you decide on the best option.
What is ULIP Policy?
Unit-Linked Insurance Plan or ULIP is one of the most sought-after plans that people go in for. It is a great combination of different investment options along with an insurance plan. A certain part of your premium goes for insurance, while the other part is invested in the market. The rate of return with a ULIP plan is higher than a normal term insurance plan.
What is Term Insurance?
Term insurance is a life insurance plan for a specific period or term. This term would be a fixed number of years that would be specified in your policy. If the policyholder happens to die before the term, his or her beneficiaries would get the benefit. Term insurance policies also come with a number of add-ons such as critical illness cover, accidental death cover, et cetera.
Difference between a ULIP and Term Insurance
ULIP and term insurance can be differentiated in the following ways:
- Nature: While term insurance only comes with normal insurance, a ULIP comes with a combination of investment and insurance.
- Lock-in Period: In term insurance, there is no lock-in period and it must be renewed every year. Also, you do not get the option of withdrawals, unless there are different riders attached with your term insurance. In the case of Unit-Linked Insurance Plans, there is a lock-in period of usually 3 or 5 years. Withdrawals can be made after the lock-in period.
- Investment Options: With term insurance, there is no investment option. However, in case of Unit-Linked Insurance Plan, a part of your premium is paid for investing in different units of companies like bonds, money market, instruments, equity, debt and more to get ULIP returns just like a mutual fund.
- Switching Options: One of the best things about a Unit-Linked Insurance Plan is the switching option. Based on the market condition, a fund advisor or manager could advise the investor about the best low-risk investment options available. Based on this, you could choose to switch from one fund to another to maximize your returns while trying to keep your risks low. Most plans also come with a cap on the number of times one could make switches without incurring any additional charges. Traditional term insurance does not come with the option of switching over from one fund to another.
- Maturity Amounts: A term insurance plan promises a specified maturity amount at the end of the policy term. This is known as the sum assured. Along with this, you may also get bonuses, if any, under the plan. However, in case of a Unit-linked Insurance Plan, the maturity amount would be the redemption of the units on the market value of the units, prevalent on the maturity date.
- Charges Involved: In the case of term insurance, there are no charges except for the premium amount. For a Unit-linked Insurance Plan, there are a number of charges that would include fund management fees, policy administration charges, mortality charges, surrender charges, fund switching charges, premium allocation and a host of other charges.
- Rate of Return: With term insurance, the return is a fixed amount that would be the sum assured. However, the nominees only get the amount in case of the unfortunate death of the life assured during the policy term. A Unit-Linked Insurance Plan comes with guaranteed rates of return.
If you wish to go in for a heavy insurance coverage then term insurance is the best option, while a ULIP insurance would give you a better rate of returns. So choose wisely.
