Key differences between term insurance, ULIPs, and health insurance

Dec 19, 2018 | 4 months ago | Read Time: 4 minutes | By iKnowledge Team

Term insurance, health insurance and ULIPs are the three critical insurance policies that one needs to invest in. While these policies are essential, there are a few fundamental differences between the three.

The idea of insurance is protection against emergencies. This protection extends itself to different causes and that’s the reason why there are different insurance products in the market. When it comes to insuring yourself, there are 3 well-known types of insurance that you may have heard of:

  1. Term Insurance
  2. Unit Linked Insurance Plan
  3. Health Insurance

These 3 types of insurance plans are different and provide a cover in different areas. Let us examine these three types of insurance.

What is term insurance?

Term insurance is a type of life insurance where the premium is entirely for covering the life of the policyholder. There is no maturity benefit in a term insurance policy. The sum assured is paid out on the death of the policyholder. Since there is no maturity benefit, the entire premium amount goes to covering the insured’s life. This is a cost-effective insurance with a higher sum assured.

 

What is Unit linked insurance plan?

A ULIP invests a portion of the premium in market instruments. This means the investment portfolio grows as per the growth in the market. A Unit Linked Insurance Plan or ULIP is an example of a linked plan where a portion of the premium is invested in different funds based on the policyholder.

ULIP has a death or maturity benefit. The sum assured is paid out on maturity. Along with the sum assured, there are other benefits such as bonus which gets added to the sum assured after a few years of the policy. In case of ULIPs, the higher of the sum assured, the fund value, or 105% of the premiums made are paid out on maturity.

ULIPs have other goals such as children’s education as well. These specific plans, such as Aegon Life’s iMaximize insurance plan that provides life cover along with investment for child’s education. This ULIP saves for the child’s education and in the event of death of the parent, continues the policy till maturity. It pays out a pre-decided death benefit on death of the parent and pays the sum assured on maturity of the policy to help with education expenses.  Depending on the goal, a different ULIP can be started, for example, a ULIP can be started for retirement, one ULIP for monthly pension, or for other goals such as wedding expenses etc.

What is health insurance?

Health insurance covers the individual or family against the risk of medical illnesses. Medical costs keep rising year on year and having a health insurance plan ensures most hospitalization expenses are taken care of. This helps to save a significant amount of savings that otherwise would have gotten diverted to medical treatment.

Key differences between term and ULIP:

The main difference between term insurance and ULIP is the savings component. Unit linked insurance plans have an element of savings incorporated in them. This means that the premium is invested by the insurance company in different funds to provide a maturity benefit. Term insurance is pure insurance. Investment in term insurance will yield no maturity benefit. However, the sum assured in term insurance is higher and the premium is lower than regular life insurance.

Term insurance does not have a surrender value. The term policy lapses on non-payment of premium. If a ULIP is surrendered within the lock-in period, the fund value till date is paid out after deducting charges. If the ULIP is surrendered after the end of the lock-in period, the insurance company has to pay out the fund value without deducting any charges.

Term insurance has a longer policy period. Typically, life insurance policies are issued for 20 or 25 years. Term insurance policies cover the policyholder up to a particular age, say 60 or 65, so if the person invests in term insurance at 30 years, the policy term is 30 or 35 as the case may be. Term insurance plans also offer coverage till 80 years or some offer coverage till 100 years like Aegon Life’s iTerm insurance plan. Providing coverage up to 100 years ensures excellent financial security for the family.

Key differences between term and health insurance:

Term insurance and health insurance are different only as regards the type of coverage they provide. Both health and term insurance policies lapse on non-payment of premium in a year. Both provide risk coverage for one year and lapse the next year until the premium is paid.

Health insurance covers the policyholder against medical treatment such as hospitalization. It covers a few pre-hospitalization charges and in most cases, does not cover post hospitalization care. Health insurance provides comfort in case of medical treatment by providing cashless treatment facilities.

Term insurance is an insurance on the life of the policyholder. In case of his/her death, the sum assured is paid out. Term insurance has riders such as accidental death, or disability benefits.

Some insurers like Aegon Life have combined term and health insurance to provide the iTerm Plus plan which includes coverage against critical illnesses. This plan includes death benefit like a traditional term plan and offers health insurance benefits such as terminal illness, critical illness coverage etc. The policy waives off future premiums if the assured is diagnosed with any of the 36 critical illnesses. This policy combines the best of term and life insurance.

Key differences between ULIP and health insurance:

ULIP and health insurance provide coverage against two different aspects. ULIP is used to invest for future goals, such as child’s education, retirement, or for financial security. Health insurance covers the individual against the risk of hospitalization and illness care.

A health insurance policy does not have a surrender value. A ULIP has a savings component and thus has a surrender value.

Term insurance, ULIP and health insurance are critical insurance policies that every individual must invest in to provide comprehensive coverage against all types of risks.

II/Dec 2018/4689

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