ULIPs vs Term Insurance: A Side-by-Side Comparison You Can’t Miss!

Life insurance is more than protecting your family’s future. These policies build a safety net but can also help create lasting financial stability. Among the many options one can choose to gain life coverage, two variants, namely, Unit Linked Insurance Plans (ULIPs) and term insurance, have become standout options for policyholders with different financial needs.

ULIP is a life insurance policy that combines investment and risk cover, which makes it ideal for individuals with dual goals. Meanwhile, term insurance only offers a death benefit (a pure risk cover).

Both seem financially appealing, don’t they? However, there needs to be one answer to your query!

To help you select the life insurance genre that best suits your needs, we are breaking down the differences between ULIPs and term plans by analysing the coverage, premiums, and tax benefits. The following insights will help you choose a plan catering to your financial requirements.

What is Term Insurance?

Term insurance is a pure protection plan that provides a sense of security for your family’s financial stability in the unfortunate event of your death during the policy term. It ensures your dependents can maintain living standards and meet financial obligations in your absence, giving you the much-required peace of mind. 

What makes term insurance plans a popular choice is their affordability and simplicity. They offer high-value life coverage at low premium rates and eliminate the need for policyholders to deal with the complexities of investments since the product is not market-linked and thus indifferent to market fluctuations.

Additional Features:

• Policyholders can customise their plans with preferred riders, such as critical illness coverage, waiver of premium, disability benefits, and more.
• The insured can choose the policy tenure and premium payment options (tenure and frequency)  based on their future financial goals and existing budgetary bandwidth.

Although term insurance policies prioritise protection over other benefits, they also provide riders with the base term and enhance its coverage for specific occurrences and tax benefits, often at an affordable cost. These add-ons offer additional financial safeguards and benefits over the basic insured sum. Hence, it is helpful to understand what each rider covers and why you must choose it.

Let’s explore the most popular term insurance riders:

• Waiver of Premium Rider: This rider ensures that the policy remains active even if the policyholder cannot pay premiums due to specified disability or critical illness. This helps policyholders manage financial obligations at a time when they would already be financially stretched.
• Accidental Death Benefit Rider: This rider provides an additional payout if the policyholder’s death occurs due to an accident. For instance, if you have a ₹1 crore term life insurance plan and add an accidental death benefit rider with a coverage of ₹10 lakh, your family would receive ₹1.1 crore in the event of your death due to an accident.
• Accidental Disability Rider: If an accident leads to a permanent disability, this rider offers financial compensation to help maintain stability during challenging times. It is beneficial for those in hazardous jobs.
• Critical Illness Rider: This rider pays a lump sum if the policyholder is diagnosed with a critical illness listed in the policy, such as cancer or heart disease. The payout can be used for treatment and managing income setbacks.
• Terminal Illness Rider: If the policyholder is diagnosed with an incurable illness and is likely to die within 6 months, this rider pays the sum assured to the insured/nominee. (Although in the case of the top term insurance policies, the terminal illness perk comes as an in-built feature.)

Always remember that terms and conditions apply to each rider and the specific events for which a claim would be accepted.

What is a Unit Linked Insurance Plan?

ULIPs are policies that merge insurance coverage and investment opportunities. A portion of your ULIP premium goes toward life insurance coverage. The remaining share is invested in mutual funds, including equity, debt or hybrid funds.

ULIPs also provide the potential for higher returns based on market performance and allow policyholders to participate in the growth of their investments. This blend of life coverage and wealth creation opportunities can be worth considering for individuals with long-term financial goals.

Additional Features:

• Policyholders get a host of customisation options. An important one is that they can choose to finish paying off their premiums early or pay them as frequently as they want. This enables them to address their financial priorities, like buying a house or securing education funds, without compromising their life cover and long-term goals.
• Individuals have the flexibility to strengthen their investment portfolio through top-up payments that can be made at any time during the policy term.

Types of ULIP Funds

• Large and mid-cap equity funds primarily deal in company stocks and equities, making them high-risk, high-reward investments.
• Debt funds, also known as bond and income funds, have medium risk and focus on fixed income/debt instruments like corporate and government bonds, alongside securities with up to 70% equity exposure.
• Balanced funds combine company shares and stocks with fixed-income instruments, offering policyholders a pre-set limit of equity and debt investments.
• Liquidity funds deal with short-term market instruments like bank deposits, commercial papers, or treasury bills. These are ideal for policyholders open to investing in any type of equity or bonds. 

Put simply, term insurance is like hiring a home security service that is strictly focused on protecting you and your assets from break-ins. ULIPs, on the other hand, are like a security service that also dabbles in growing your investments. It guards your home but also works to grow your property’s value through renovations and other efforts.

Key Differences:

The Top ULIP and Term Insurance Providers

When choosing the best term insurance or ULIP provider, you must look for several factors, including track record, Claim Settlement Ratio (CSR), complaint volume, average annual business and product portfolio.

• An insurer’s track record gives you an understanding of the longevity of their products, which is critical when buying policies with longer terms.
• Claim settlement ratios allow you to gauge an insurer’s claims settlement track record. Say an insurer settles every 97 of the 100 claims raised in a year. Their CSR would be an impressive 97, which, at Ditto, is considered a recommended score. Any score above 97 indicates that the provider diligently ensures their policyholders receive the insured sum when they need it most.
• To make a truly informed decision, you must look into a provider’s complaint volume. This metric indicates the number of complaints the insurer receives per year relative to their total number of policies. A lower number of complaints means higher operational proficiency and a smoother journey to claim settlement.
• The average annual business is a metric that indicates the size and stability of a provider. For instance, maintaining a high CSR and low complaint volume is easy for a firm with a smaller clientele. But when an insurer achieves the same when the number of clients is in the tens of thousands, maybe even more, it is a true sign of their ability to pay out claims in the unfortunate event of your demise.
• Lastly, an insurer’s product portfolio is also essential as it gives you a clear picture of how much they care for the policyholder’s needs through various comprehensive policies.

The following is a list of the best term insurance providers and the extra benefits they offer:

Unlike term insurance plans, which are easy-to-understand policies that offer coverage over a specified period of time, ULIPs are relatively complex, thanks to their investment component and the potential risk associated with it. These shortcomings are often counterbalanced by their tax benefit (of up to 1.5 lakh) under Section 80C and the growth in cash value based on market performance.

Here’s a list of the top ULIP providers and the returns they provide in different fund types across a 5-year period:

Special Considerations for Choosing a ULIP

In the case of ULIPs, metrics like CSR, complaint volume and annual average business only give you part of the bigger picture. These extra elements are why choosing a ULIP requires you to go beyond and thoroughly assess the following factors:

• Answer the “Why?” behind your decision to opt for a ULIP. Suppose you are looking to achieve a long-term goal like retirement. In that case, starting early in life and prioritising equity funds would be best. Later in life, you can slowly transition to more debt funds to reduce risk and volatility. Alternatively, you can opt for a smaller term (up to 7 years) and invest primarily in equity to ensure high returns.
• Picking the right funds is vital to maximising the value of a ULIP. You can choose high-risk, high-reward equity funds, stay safe with low-risk debt funds or do both by selecting a balanced fund with moderate risks. Above all, the decision must be based on whether the chosen funds align with your goal, income and timeline.
• Carefully read through the policy terms to understand how it works, and always stay in control of your money. Some important details include the insured sum, the number of times you can switch funds, the duration of ULIP insurance, the time required before you can surrender or withdraw funds, and the amount you will receive at maturity.

Pros & Cons of Term Insurance and ULIP

Why Talk to Ditto Before Making Your Choice?

At Ditto, we’ve assisted over 3,00,000 customers with choosing the right insurance policy. Why customers like Dhiren below love us:

✅No-Spam & No Salesmen

✅Rated 4.9/5 on Google Reviews by 10,000+ happy customers

✅Backed by Zerodha

✅100% Free Consultation

You can book a FREE consultation. Slots are running out, so make sure you book a call now!

ULIPs vs. Mutual Funds: Why Mutual Funds Often Come Out on Top

While ULIPs combine insurance and investment, it’s essential to compare them to another popular investment option: mutual funds. For many investors, mutual funds offer a more transparent, flexible, and cost-effective route to wealth creation.

Here’s why mutual funds often have the edge:

• Lower Costs: ULIPs typically have higher charges, including premium allocation charges, fund management fees, and surrender charges. Mutual funds, on the other hand, generally have lower expense ratios. This means more of your money is working for you, generating returns rather than being eaten up by fees.
• Greater Transparency: Mutual funds offer greater transparency in terms of fund performance and expense ratios. You can easily track the fund’s performance and understand exactly how much you’re paying in fees. ULIPs can sometimes be less transparent, making it harder to assess the true cost of the investment.
• Higher Liquidity: Mutual funds are generally more liquid than ULIPs. You can typically redeem your mutual fund units at any time without incurring significant penalties. ULIPs, on the other hand, have a lock-in period, and surrendering before the end of the term can result in substantial charges.
• Flexibility: Mutual funds offer greater flexibility in terms of investment options. You can choose from a wide range of mutual funds that invest in different asset classes, allowing you to tailor your portfolio to your specific risk tolerance and financial goals. ULIPs may offer fewer investment options, limiting your ability to diversify your portfolio effectively.

Striking the Balance: MF + Term Insurance 

Many financial experts advocate for separating insurance and investment needs. This approach, combining term insurance and mutual funds, often proves more beneficial than ULIPs for several compelling reasons:

• Cost Efficiency: As highlighted earlier, ULIPs come with multiple layers of charges. By opting for term insurance for pure risk coverage and mutual funds for investment, you can significantly reduce costs. Term insurance offers high coverage at very affordable premiums, and mutual funds offer a range of options with varying expense ratios, allowing you to choose cost-effective investment vehicles.
• Flexibility and Control: With term insurance and mutual funds, you have greater control over your investments. You can choose mutual funds that align with your risk tolerance and financial goals, and you can adjust your investment strategy as needed. ULIPs may offer limited investment options and less flexibility to switch funds or make withdrawals.
• Transparency: Mutual funds provide greater transparency in terms of fund performance and expense ratios. You can easily track the fund’s performance and understand exactly how much you’re paying in fees. ULIPs can sometimes be less transparent, making it harder to assess the true cost of the investment.
• Liquidity: Mutual funds are generally more liquid than ULIPs. You can typically redeem your mutual fund units at any time without incurring significant penalties. ULIPs, on the other hand, have a lock-in period, and surrendering before the end of the term can result in substantial charges.
• Focus: Separating insurance and investment allows each component to serve its purpose effectively. Term insurance focuses solely on providing financial protection for your family, while mutual funds focus on generating returns to help you achieve your financial goals. ULIPs attempt to combine these two objectives, potentially compromising their effectiveness.

Essentially, the combination of term insurance and mutual funds offers a more transparent, flexible, cost-effective, and focused approach to financial planning compared to ULIPs. It allows you to optimise both your insurance coverage and your investment returns, ultimately putting you in a better position to achieve your financial goals.

Now that we thoroughly understand term insurance and ULIPs let’s try to finalise the ideal plan for you.

ULIPs are only considered ideal for aggressive investors who can handle market swings, are okay with 5-year lock-in periods, and pay steep costs. However, these downsides can easily overshadow any potential gains for most individuals.

A better option for most working professionals with dependents is a combination of term plans and mutual fund investments as it will ensure life coverage while retaining the ability to invest in a wider range of fund options without any insurance charges reducing your capital gains.

If you need any more help choosing the right policy, feel free to chat with us on WhatsApp or book a call at a convenient time. No spam – just honest insurance advice.