Term Insurance vs ULIP: Why Term Plans Offer Better Protection for Your Family

At a Glance: 

1. Introduction
2. What is Term Insurance?
3. What is ULIP (Unit Linked Insurance Plan)?
4. Difference Between Term Insurance and ULIP
5. Why is ULIP Better for Self-Employed People?
6. What Makes Term Insurance a More Popular Protection Option?
7. Final Verdict: Term Insurance vs ULIP

Introduction

One of the most important financial decisions is to choose an appropriate life insurance plan for the family's future. Although it has many plans available in markets, it is the most important part to know the differences so that you can select the best plan that meets your financial goals without compromising protection.

Among the many types of life insurance available, Term Insurance and Unit Linked Insurance Plans (ULIPs) are perhaps the most debated. Although having similar purposes for providing life coverage, they differ among themselves and in the financial goals they serve. Term Insurance is a pure protection plan that protects loved ones in case of an untimely demise, while ULIP is an insurance+investment arrangement that enables policyholders to build wealth while remaining insured.

Even though ULIPs are good from an investment standpoint, Term Insurance, at the other end of the spectrum, is a very safe and cheap means to obtain financial protection, offering high cover at discounted premiums. The article gives a lucid comparison between Term Insurance and ULIPs, helping you understand their differences and why Term Insurance is distinguished as the best protection tool from the viewpoint of securing your family's future.

What is Term Insurance?

A Term Insurance plan is a pure protection policy designed to provide financial security to your loved ones. In other words, it is designed to ensure that your family receives a lump sum payout (sum assured) if the policyholder dies during the policy tenure. Unlike other life insurance plans, term insurance has no maturity or investment benefits; hence, it is the most affordable form of insurance for anyone looking for maximum coverage at minimum cost.

This aspect is most helpful for someone who wishes to protect the future of their family in the event of some contrary conditions that may come up, like a sudden disappearance of any income due to the policyholder's death. This is a sort of safety net that has ensured that dependents can still meet day-to-day expenses, repay loans, or pursue long-term goals in education and marriage, for instance when the main purse-string holder has departed.

As of early 2022, term insurance ownership in India has risen to 43%, up from 36% two years prior. This indicates a growing trend among consumers towards securing term insurance policies (Business Standard). A significant portion of new buyers includes millennials and self-employed individuals, with purchases among self-employed individuals spiking by 50% recently. The majority of these buyers are aged between 27 and 38 years (Business Standard).

Key Features of Term Insurance:

1. Affordable Premiums

Term life insurance is one of the cheapest options available for getting comprehensive life coverage. Being purely a protection cover, the premiums are much lower than ULIPs and all other investment-linked insurance policies. The affordability, therefore, makes it available to every class of persons across income groups as it gets within their means to avail themselves of great financial protection.

2. High Sum Assured

Term insurance plans are known for paying high sums assured, hence offering the greatest advantages to the nominee in the event of the policyholder's untimely death. The money can help to meet basic expenses like sustenance of life, loan payments, costs of children, and other financial commitments. In other words, high coverage means that even with the death of the primary wage earner, the dependents can still afford to live comfortably without financial apprehension.

3. No Maturity Benefits

Term insurance is different in nature from an endowment policy or a ULIP because it does not give any maturity benefits when the policyholder survives the duration of the policy. Since the whole premium is allocated to life coverage, it can afford to provide much higher coverage at a lower cost. However, certain companies tend to offer a return of premium (ROP): all the premiums would be refunded in the case of a no-claim situation at the end of the policy term. This option comes at a higher premium, though.

4. Flexible Payout Options

Different options are provided in term insurance to give the policyholders an option to choose the best payout facility according to their requirements. The death benefit can either be taken as a one-time payment to give instant financial backing to the nominee or monthly income payouts, which help keep the dependents financially afloat. Some even combine the two above; that is, lump sum payments followed by monthly payments. This helps in planning finances in the long run.

5. Tax Benefits

Term insurance gives more than mere financial security. It offers tax benefits, too. Term insurance premium payments qualify for deductions under Section 80C of the Income Tax Act up to a ceiling of ₹1.5 lakh per year. The demise benefit is also tax-free in the nominee's hands under Section 10(10D), ensuring that families receive the whole amount without tax deduction. Some term plans with health riders have also the additional benefit of offering tax exemption under Section 80D and so add to the financial relief.

What is ULIP (Unit Linked Insurance Plan)?

A Unit Linked Insurance Plan (ULIP) is a uniquely structured financial product with two objectives: the life insurance cover and the investment. Part of your premium payment for a ULIP amounts to a life insurance cover that protects your family financially in case any tragedy strikes. The remaining portion is invested in a fund with a market link to equity, debt, or balanced funds according to your risk appetite and financial objectives. While ULIPs provide opportunities for wealth creation, they also secure your dependents against any emergencies.

ULIPs have gained popularity and now dominate the new premium income of private sector insurers. They accounted for approximately 45% of the new business premiums from individual policies for major insurers like LIC (Actuaris India).

Key Features of ULIP

1. Investment Component

One of the major highlights of ULIPs is perhaps their investment component. Various fund options are available in which ULIPs allow the policyholder to invest, while a traditional insurance plan focuses solely on protection. In this case, investors can go for higher risks and more returns with equity funds, seek stability with debt funds, or combine both with a balanced fund. 

2. Market-Linked Returns

Returns from ULIPs are market-linked, which means that the performance of the policy is connected with the ups and downs of the stock markets. Traditional insurance plans present an opportunity for earning returns, but with the added advantage of earning a higher return, it comes with a level of risk also from the investment perspective.

3. Lock-in Period

ULIPs impose a mandatory lock-in period of five years during which the policyholder cannot access funds. This creates discipline in the long-term financial duration of investments and safeguards that investments have enough time to grow. It will allow partial withdrawals after the completion of this mandatory lock-in period for emergency cash flow or for short-term goals.

4. Tax Benefits

Multiple tax benefits are conferred on ULIPs which makes it an investment option with the highest tax efficiency. The premiums paid are eligible for deductions under Section 80C of the Income Tax Act which makes it possible for policyholders to claim deductions within an annual limit of ₹1.5 lakh.

Difference Between Term Insurance and ULIP

Why is ULIP Better for Self-Employed People?

For self-employed individuals, a Unit Linked Insurance Plan (ULIP) is a smarter choice than a Term Plan as it offers both life coverage and investment benefits. Unlike term insurance, which only provides a payout in case of death, ULIPs help grow wealth by investing in equity, debt, or hybrid funds while also securing your family’s future.

One of the biggest advantages of ULIPs is their tax benefits. Under Section 80C, premiums paid are eligible for deductions up to ₹1.5 lakh per year. Additionally, under Section 10(10D), the maturity amount is tax-free if conditions are met.

For self-employed individuals with irregular income, ULIPs offer flexible premium payment options and the potential for long-term wealth creation. While term plans only provide risk cover, ULIPs ensure financial security and investment growth, making them a better holistic solution for entrepreneurs and freelancers.

What Makes Term Insurance a More Popular Protection Option?

1. Higher Coverage at Lower Cost

A term insurance policy can provide a sum assured of ₹1 crore at a very affordable premium to make sure that your family remains financially protected. 

2. No Market Risk

Unlike ULIPs, where market performance determines the fate of your investment, guarantees are clear and firm for a term plan. 

3. Simple and Transparent

Term plans are simple; there are no hidden costs and no roadblocks like fund management fees. 

4. Flexible Payout Options

You can choose any of the modes- lump sum, monthly income, or a blend of both for your family to effectively manage expenses. 

5. Tax Benefits

Premiums paid under term insurance qualify for deductions under Section 80C, while the death benefit comes tax-free under Section 10(10D).

How to Choose the Right Insurance Plan?

It is pertinent to consider individual goals when choosing an insurance plan. Consider the following before choosing between term insurance and ULIP:

• Your Financial Goals: If you want to secure your family's financial future, term insurance is a better option.
   
• Risk Appetite: If you can withstand market volatility, ULIP might suit you.Affordability.
   
• Term insurance: Gives high coverage for low premium rates.
   
• Investment Knowledge: ULIPs will require management and understanding of the stock market on your part.

Final Verdict: Term Insurance vs ULIP

Term Insurance is the best option in terms of financial protection for your family. Whereas ULIP seems to be a good investment option, its dependency on the market makes it risky. Term plans provide affordable but high-value coverage, assuring your family of security in uncertain times. Choosing the appropriate life insurance is one of the vital decisions in life. 

If you want total financial protection, term insurance is certainly your option. At OneAssure, we have a dedicated team who will assist you with the best term insurance plans designed as per your requirement. Compare, Choose, and secure your family's future today.