Term insurance vs. ULIP: Which is a better buy?

When you invest in the long haul, you also want to secure the life of your loved ones in case of an unforeseen event where you lose your life. Life insurance provides financial cover to your loved ones in your absence. These days, there are several types of life insurance plans available in the market, which cater to the different needs of different consumers. The popular choices these days that many people are considering investing in are term insurance and Unit Linked Insurance Plan (ULIP).

Both types have their distinct features and benefits. Before knowing the differences between them, it is important to understand what a term insurance is and what a ULIP is.

Understanding a term insurance

Term insurance is a simple form of life insurance where you get a life cover for a fixed period. You, as a policyholder, choose the tenure of the policy. You can use a term insurance plan calculator to get an estimate of your premiums based on your sum assured and tenure of the policy. Within the tenure of the policy, if a policyholder loses their life, the nominee may receive a sum assured. However, there are no maturity benefits offered in a term plan. Also, since it is a simple type of life insurance, there are no savings or investment components attached to it. Since term insurance is a life cover for a fixed tenure, it offers an immense sum assured for a low amount of premiums.

Understanding a ULIP

ULIP is a two-in-one financial instrument comprising two components: insurance and investment. When you buy a ULIP, the premiums you pay are partly used towards providing you with a life cover and partly invested in the funds of your choice. In a ULIP, there are namely three types of funds you can choose from based on your risk appetite. They are equity, debt, and balanced funds. It also allows you to switch between these funds whenever you want and you can also avail of partial withdrawals during times of emergency. When your ULIP matures, if your life insurance was not claimed, you will get a sum assured. The ability to switch between investments makes ULIP one of the most flexible instruments in the market.

Term insurance vs. ULIP: Which one to buy?

Both term insurance and ULIP are life insurance products. There is no clear best choice here since both cater to different needs. Instead, understand the perks of both and choose one accordingly.

Factors that compel you to choose term insurance over ULIP

  • Low premiums
    One of the biggest USPs of term insurance is their low premiums. It is a type of affordable life insurance with no other components attached.
  • Huge sum coverage
    If you use a term plan calculator, you will find that you can get your desired sum assured of lower premiums when compared to other types of life insurance policies. This makes it easier to buy a term plan and make timely payments.
  • Affordability and easy payments
    Term insurance is quite affordable where since you can make monthly payments for as less as Rs 400 a month or even lower, depending upon your age and lifestyle. Also, the monthly amount you choose is locked until the end of your tenure. So, you do not have to worry about increasing payments over a period. You are required to pay the same amount of premium till the end of your tenure.

Factors that compel you to choose ULIP over term insurance

  • Flexible investment
    ULIPs are flexible as they allow you to invest and switch according to your convenience, risk profile, and financial commitments. ULIPs allow you to switch between funds whenever you want.
  • Partial withdrawals
    Since a ULIP has an investment component along with life insurance, you get a sum assured after maturity. However, you can withdraw partial funds after the lock-in period whenever you need.

Term insurance and ULIP, both solve different purposes. While one is pure life insurance, the other has an investment component attached. Depending upon your future needs, choose the one that serves your purpose. You can also add other types of financial instruments to your portfolio based on your goals.

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