Term Insurance vs ULIP – Comparative Analysis with Calculations

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term-insurance-ulipInsurance is a term we all are aware of. As soon as we hear the word “insurance”, the first thing that comes to the mind is financially securing something valuable against uncertain mis-happenings.

Now, there are two options that can be considered, which can give you both investment as well as insurance-

  • Term Insurance + Mutual Funds
  • Unit Linked Insurance Plan

Term Insurance + Mutual Funds

Term insurance is just the same as any other insurance with just a slight difference. It is made on the life of a person. Although it cannot ensure the safety of one’s life, so it is technically ensuring minimum financial loss due to the death of the policyholder.

Life is priceless and it cannot be measured in monetary terms, but getting a term insurance ensures steady cash-flow for the well-being of your loved ones in your absence. All those things that you had planned for your family and loved ones can be secured even in your absence.

The reason behind taking an insurance, which is taking care of your loved ones, makes this investment decision all the more crucial. Since, it is not just about finances anymore, it is about emotions too.

A term insurance plan is made on the life of a person. Here, the policyholder pays a small amount of money every month called as “premium”, in return of which he is promised that a hefty sum of money will be paid to his family which is called “maturity amount”, in case of any unfortunate event where the policyholder either dies or is no longer capable of taking care of his family.

The catch here is that, the policy will mature only if the policyholder encounters an unfortunate event which results in either death or permanent disability of the person. If fortunately everything is good and the policyholder survives the time period, the policy shall lapse or can be extended depending on the case. Therefore, it is not an investment plan, but purely an insurance plan.

Thus, this policy is extremely beneficial if the person insured is also a significant contributor to the finances of the family. The intention of this policy is to provide maximum cover to the policyholder at a minimum premium, such that the family of the insured doesn’t have to suffer from any financial troubles in the absence of their loved one.

Mutual Fund is an investment plan where the company pools money from small investors on a monthly or lump sum basis and then invests in the market to get maximum returns. Here the investor has the option to make small monthly payments or a lump sum amount which is then invested in the market by experts to get maximum returns out of the money invested.

Since, mutual funds have industry experts who have extensive knowledge about the market, it is preferred to invest through mutual fund when the investor has little or no knowledge about the market. Also, history reveals that although mutual funds are inconsistent in nature, it offers decent returns in long term.

With the flexibility of investing lump sum or small monthly payments, even small investors who wish to earn market returns from small savings can benefit from mutual funds.

Unit Linked Insurance Plan (ULIP)

A ULIP is a combination plan where you get the benefit of both life insurance and investment. The money you pay as premium is partially used for insurance and partially for investment.

At the end of maturity period it offers a lump sum amount. Although it offers the benefit of insurance, i.e. in the event of the death of the policyholder during the term of the policy, the nominee gets the maturity amount, but it is not conditional. Even if the policyholder is alive after the expiry of the tenure, he will get the maturity value at the end.

It has clubbed the benefits of both investment and insurance.

Here, after the revision by IRDA, the policyholder has the choice to choose the kind of investment he wants to make out of the investment portion after deducting the insurance component. He may invest either in debt or equity.

Which one to choose? ULIP or Term Insurance + Mutual Funds

Both ULIP and Term Insurance + Mutual Funds are investment plans. But the question here is which one should you go for?

It is a crucial decision which has both emotions and finances involved. So let’s see it with an example and evaluate both the plans individually.

For example:

Ram has Rs. 100,000 to invest annually. Let’s consider how he can invest in the two investment options mentioned above and which of them will provide him a better return.

For the purpose of calculation, let’s assume that both Mutual Funds as well as ULIP’s earn a return of 15% p.a.

Case I: Term Life + Mutual Fund

Suppose Ram took a term insurance from Aegon Term Insurance. He has to pay a premium of Rs. 584 per month for a cover of Rs. 1 crore.

To calculate the premium on your own refer to the term premium calculator here.

So, the money left with him after deducting the insurance premium is,

100,000 – (584*12) = 92,992

The balance is then invested in mutual funds on monthly basis, which shall be,

                                                92992/12 = 7750

Assuming mutual funds offer an average return of 15%, after 20 years Ram will get, around Rs. 1.16 crores

So, in the worst case scenario if Ram dies within 20 years his family will get the maturity sum from Term insurance as well as Mutual Fund which sums up to around 2.16 crores.

Case II: ULIP

In the second case, we assume that Ram has invested Rs. 100,000 p.a. in ULIP only. It is a combination plan wherein some amount of the premium goes to insurance coverage and the balance is invested in the market.

So, for a premium of Rs. 100,000 you get a cover of around Rs. 50 lakhs.

The monthly premium comes out to be 100,000/12 = 8,333.

Now, let’s see how much of the money is actually invested.

There are various charges that are deducted from ULIP premium, such as,

  • Premium allocation charge
  • Policy administration charge
  • Fund management charge
  • Mortality Charge

Some of these charges vary with the tenure of the policy term. For instance, deduction from year 1-5 will be different from the charges levied on year 5-10 of the whole policy term.

After deducting these charges and investing the remainder, we calculate that the maturity amount at the end of 20 years at approximates to Rs. 1.08 crores. (Assuming 15% return p.a. – same as for Mutual Funds)

Therefore, at the end of 20 years Ram’s family will get Rs. 1.08 crore.

Conclusion

After having compared the two investment options, in our opinion we think that Term insurance + Mutual Fund is a smarter choice, as it offers higher return as compared to the other.

We hope this article helped you have a better clarity with respect to which investment option to choose for your secure future.

Karan is CA by Qualification with the rare distinction of being awarded All India Rank 22. He is also the founder of this website and is an expert in helping people save Taxes legally. He can be reached by booking an appointment for Tax Advisory Service.