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Unit-Linked Insurance Plan (ULIP) vs Life Insurance: Here’s What You Need to Know

Jul 02, 2018 | 2 years ago | Read Time: 3 minutes | By iKnowledge Team

Imagine this situation in a cricket match: It is the last over and your team needs 20 runs to win. At one end of the crease, you have a specialist batsman who is a proven match winner and on the other end, you have an all-rounder who can bat and bowl but is not as good a batsman as the other player. Whom would you rather see at the striker’s end? Naturally, the specialist-match-winner batsman, who will get the job done.

This situation directly correlates to your choice when deciding between a ULIP and an insurance policy. With so many insurance companies offering both these products, how do you decide which one is ideal for you? While both provide cover, it is up to you to decide which instrument is more appropriate to fulfil your requirements.

Difference between ULIP and Life insurance

ULIP is an integrated instrument that combines investment and insurance. A part of the premium paid for a ULIP is deducted as mortality charge i.e. insurance and another part is invested in funds. A ULIP’s purpose is wealth creation and increasing your capital.

ULIPs are generally favoured because they offer both insurance and investments in a single product. Most investors who wish to have a combined product opt for ULIPs, firstly because they are market-linked, and secondly, they deliver results based on market conditions.

A term insurance policy, on the other hand, is a pure protection plan. The premium paid, goes solely towards mortality charges. It has no element of investment. The fundamental purpose of term or life insurance is to provide your family, the assurance of coverage of a fixed amount and safeguard their financial position in case of your death.

Insurance policies include term plan, endowment and whole life insurance plans that fall under the aegis of traditional plans. They are regarded as risk-free, and offer specific returns, in the event of death or at the end of the term.

So how do you decide which option is the way to go?

While a ULIP gives dual benefits of investment and insurance in a single instrument, is it necessarily suitable for you? The answer to that depends entirely upon your need. If your purpose is insurance for life, along with investment, choose ULIP. If your purpose is protection against mishaps in the future, choose a pure insurance policy as it is risk free and premiums to be paid on it is also comparatively lower than a ULIP.

As most finance professionals will tell you—to get adequate protection, you must get a minimum life cover worth ten times your annual income. Now ULIPs, almost universally, provide life cover of exactly ten times the annual premium. Therefore, if you were to insure yourself through a ULIP, you would end up paying all of your income towards premiums.

It is best to tackle investments separately and not merge it with insurance because the parameters to evaluate both are different. Investments are evaluated based on personal needs like liquidity, volatility, transparency, return, time-horizon, tax implications, etc. and can change over time depending upon your financial situation. Whereas, an insurance cover is highly dependent upon the number of dependents and their needs in case of your demise. So, once you have secured your family’s future via insurance, you will be better placed to explore investment opportunities. An ideal and cost-effective way to do this is by investing in a pure term insurance policy with highly affordable premiums.

Interestingly, you can avail of tax savings with both products, under Sec 80C of the Income Tax Act.

 Bottom line

If your objective is to provide financial stability and security to your family, it is advisable to opt for a term insurance. Since choosing the correct instrument is based solely on your expectations and prerequisites, a term insurance is the better choice if you don’t want your family to bear a financial crunch after your demise.

Advt. no.: IA/Jun 2018/4154


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