The investment portfolio largely depends on your needs. By that we mean, whether you are saving for long-term, short-term, child’s higher education, retirement, life cover, and so on. When investors plan to insure life they usually turn to term plans or Unit Linked Insurance Policy (ULIP). So, it is natural to have questions like, which is more effective over the other? Which one will suit my needs? What is the difference between the two?.
So, through this article, we intend to shed some light on these general questions that you may have. Let’s take a look.
What is Term insurance?
Term plan intends to exclusively provide life cover in the event of the death of the insured person so that the family stays financially secured. For instance, if you take a term plan of 30 years with a 1 crore cover and pay Rs10,000 as a yearly premium, then this premium is solely dedicated to providing life cover, and that too only in the case of death before 30 years.
What is ULIP term
ULIP provides life cover and also has an investment proportion. So you enjoy the flexibility of paying the premium partially towards life cover and partially towards other investments options like equity, debt, bonds, and other security based on your risk profile.
A glance at key differences
- Preference
Term insurance will suit if you are a breadwinner and your only reason to take the plan is to secure your family financially. However, if you want to reap the benefits of investment along with the insurance then ULIP is a better option.
- Risks
Returns of ULIP completely depend on markets and hence high-risk investments. Since the returns of ULIP fluctuate depending on the market performance they offer higher returns. On the other hand, the rationale of term plans is to provide a fixed life cover and thus there isn’t a scope of returns in the traditional sense.
- In terms of active investment
ULIPs are the best option if you want to get actively involved with the investment. For instance, if you want to invest in equity but lack technical knowledge then ULIPs are for you. Because the job of analyzing the profile, researching the best performing funds, and selecting the well-performing funds is done by the fund managers in case of ULIPs. Term insurance takes a low-risk road and hence doesn’t offer this benefit.
- Charges
Since ULIPs are managed by the fund managers, you can expect some charges for maintaining the funds. Charges like fund manager’s fees, administration charges, etc. However, term plans have no such charges because funds are not actively managed.
- The ideal time to invest
It is advised to invest in term insurance when you are between 25-35 years. The health-related risk increases with your age and so does the premium. This is not the case with ULIPs as you can invest in them as and when it suits your needs. Also, you should invest in ULIPs for at least 3-5 years, Term plans come with a fixed duration.
So, we hope this article helps you choose the right plan based on your investment plans and needs. If you have any doubts, we will be happy to assist you.
