As people begin the process of planning for the future, there is one question that comes to mind. “Do I really need a Term Insurance Plan, or can an ULIP Plan fulfil this purpose for me?”
On the surface, both may appear similar since they involve life insurance coverage. However, upon closer inspection, you will notice that the objectives of each are quite different. While the objective of one is solely for protection purposes, that of the other is more balanced towards investment and protection aspects.
This blog will answer all these in the simplest form of English, making it easy even for a young, old, or new insurance individual.
A term insurance plan represents the simplest form of a life insurance plan.
In short, you pay a predetermined amount each year. If anything untoward happens to you during the term of the insurance policy, a large amount of money will go to your family. This amount will help them with their everyday, loan, and educational expenditures, as well as their future requirements.
If the policy ends and the policy owner is alive, there is no money that is repaid. This is because the purpose of a term insurance policy is not savings or profit. It is solely for the safety of the family. As it has a specific use, a term insurance policy provides a very high amount of life insurance for a very small price. This is why it is assessed as a base for financial planning.
A ULIP Plan offers a combination of two different things: insurance and investment. Your premium also gives you coverage for life insurance. The other portion of it is used to invest in the market, for example, equity and debt funds. The outcome of the investment could change depending on market performance.
A ULIP plan is sometimes called a solution that acts as a help to you to save, invest, and get insured all in one place. It is meant for persons who want to increase their wealth in the long run and face no problem while going through all the ups and downs.
The first thing one should know is that ULIP plans. It has been believed that as a ULIP plan has insurance in place, there is no need to purchase a term insurance plan separately. This notion primarily exists as people like the idea of ‘One plan for all’.
Although this appears rather convenient, it can lead to a grave error if there is confusion between protection and investment.
The truth is, it does not necessarily do so. A term insurance plan is specifically made to offer your family strong financial protection only. A ULIP plan attempts to achieve both tasks simultaneously: insurance as well as investment. Due to this reason, a ULIP plan cannot offer the same life cover as a term insurance plan.
In most ULIPs, the premium paid towards the insurance component is lower since a greater portion of your funds goes into investing and other fees. This means that if anything were to happen to you, the amount paid out may not be sufficient to sustain your family.
One of the biggest differences between the two plans is the price. A term insurance plan is very economical. With a meagre annual premium payment, you can avail yourself of very high life insurance. This option is most appropriate for those individuals who have family members, a house loan, or any other liabilities.
A ULIP plan is expensive since it contains charges pertaining to investment. As a result of incurring higher costs, the sense of protection obtained is limited. It is therefore dangerous to rely on a ULIP plan solely in matters of protection.
A term insurance plan does not generate any returns. The sole purpose of this plan is to provide financial assistance to your family in case something unfortunate happens to you. There is no risk of the market involved here. The amount is guaranteed.
In the case of a ULIP, the returns are market-linked. That is, the returns will vary depending on the performance of the market. If the market performs well, your returns will grow well. But, on the other hand, if the market falls, your returns will not be very high. Due to this risk, a ULIP is not a complete replacement for the term insurance plan.
A term insurance policy is very easy to understand. You pay your premium, and your loved ones are secured. There are no investment options, no market performance, and no complexity.
A ULIP is complex:
Knowing the real intention behind each plan is highly significant.
The term "insurance policy" has the sole purpose of securing your loved ones financially. The purpose of a ULIP plan is primarily to help you increase your money and also provide insurance coverage. The moment you attempt to substitute protection with investment, you can end up with poor protection. That is always the biggest risk that most people tend to overlook.
Rather than picking between them, it is far smarter and safer to use both of them in different ways. The very first priority should be a 'term insurance plan.' A term insurance plan will make sure that your family is always taken care of, no matter what happens.
After your protective plan is set up, if your aim is to invest long-term and you will not mind taking risks associated with the market, then you may choose a ULIP plan.
A Term Insurance Plan is useful for:
Such individuals will therefore benefit immensely from having a term insurance plan as an integral part of their financial portfolio.
A ULIP could be a good choice for:
It is always advisable that ULIPS should be used for investment purposes and not for protection.
It might appear very clever to replace the term "insurance plan" with a ULIP plan; however, the truth is it might leave your family unprotected. A term insurance scheme provides excellent and relatively cheap protection. A ULIP helps in wealth creation; it does not provide extensive coverage. Both plans have their usefulness, although their applications differ remarkably.
Thus, will a ULIP plan substitute for a term insurance plan? The clear answer is no. A term insurance plan should always be given priority since the safety of your family should never be compromised. A ULIP plan should come later if you are interested in acquiring the benefits of investment and are willing to bear market risks. The smart move financially is not which plan to choose over the other. The wise choice is which plan is appropriate for a given use.
Moneycontrol Journalists are not involved in creation of this article.
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