Before going to compare ULIP Vs Term Plan, Don’t forget the basic rule “Insurance is an expense and it should be treated as an expense. Don’t mix insurance with investment.” Mixing the two will give you less than moderate returns from both.
Though it’s a long article if reading till end your all doubt will get clear.
ULIPs and endowment plans are very popular in India. Most people are buying these policies. As they appear transparent, simple and highly beneficial.
What are ULIPs and Endowment plans?
Both are insurance cum investment products.
ULIP is a market-linked insurance scheme where the scheme invests in equity or debt oriented schemes, whereas Endowment Plans offer a guaranteed benefit called the sum assured.
What’s wrong with them?
Neither do they provide adequate insurance, nor a good investment solution?
Most people fail to understand the amount required to fulfill future needs in case of some mishaps. For example, in a family of 4 people where you are the only earning member, a life insurance coverage of Rs 5 lakh is simply not enough in case of your untimely death. What if you had loans running? And, then there’s inflation, which will eat away your wealth.
For the cover of Rs 50 lakh, term plan costs you Rs 7000 per annum, but in case of ULIP it will cost you Rs 5 lakh per annum.
The biggest factor that goes against ULIP is the excessive charges. A significant percentage of the premium you pay, particularly in the initial years, are deducted in the form of various fees and charges, and distributor commissions. This reduces the amount of your premium that is actually invested to generate returns. Over a long period, that makes a huge impact on the total wealth you are able to accumulate. Below is the one example of ULIP.
Annual premium: Rs 50,000
Sum Assured: Rs 5,00,000
The actual invested amount is after deducting the following charges which make up almost 7% of the total invested amount.
So, in 10 years you have paid Rs 5 lakh. But, the actual invested amount, after deducting all charges, will be around Rs 4.68 lakh.
What is the Best Way?
As earlier said, It is always better to keep insurance and investment separate. If you have financial dependents, the first thing is to buy a term insurance with a sufficient cover. Put the rest of the money in one or two good diversified equity funds.
A number speaks everything.
In the table below, 3 options are compared – ULIP, Endowment plan, and Term plan with equity mutual fund.
Although the final decision will be yours, from above example, it is clear that 3rd option looks better as you are getting more life cover and also it is better if compared based on return point of view.