A Term Insurance is an insurance policy where the policyholder pays premiums and his/her beneficiary gets an assured sum in the event of the policyholder’s demise (within the policy duration), else premiums are forfeited.
A Unit Link Insurance Plan (ULIP) is a combination of insurance and investment. A part of the premium paid is utilized to provide insurance cover to the policyholder while the remaining portion is invested in various equity and debt instruments.
In terms of packaging, ULIP seems like an ideal investment option which gives you dual benefits, until you read between the lines of its offer document. ULIPs have a lot of hidden costs (allocation charges, mortality charges, policy administration charges & management fees), which reduce your return, and the insurance cover provided is also extremely low.
We have shown here why the Mutual Fund + Term Insurance combination works better than ULIPs. The money can be spent either to buy a ULIP or to buy a term insurance with a higher sum assured and invest the balance in a mutual fund of identical style/ risk profile.
For the analysis, we have assumed:
(i) Age: 30 years (ii) Investment: ₹50,000 p.a. (iii) Tenure: 20 years
To enable comparison we have presented a combination of Mutual Funds + Term Plans v/s ULIPs.
|ULIPs (in ₹)||Mutual funds + Term Insurance (in ₹)|
|Insurance cover||5 lakhs||1 crore||50 lakhs||25 lakhs|
|Premium charges for Term plan p.a.||–||7100||4050||3300|
|Amount invested in MFs p.a.||–||42900||45950||46700|
|In the event that the policyholder survives till maturity, the payout will be:|
|Amount at the end of 20th year||26.17 lakhs||38.02 lakhs||40.73 lakhs||41.39 lakhs|
|In the event of policyholder not surviving till maturity, the payout will be:|
|At the end of 5th year||7.98 lakhs||1.03 crore||53.34 lakhs||28.39 lakhs|
|At the end of 20th year||31.17 lakhs||1.38 crore||90.73 lakhs||66.39 lakhs|
* For ULIPs as well as term insurance, we have considered averages of 10 leading insurance companies.
Returns: Last 10 years average returns as on 10th March 2016 have been considered.
It can be seen that term plans give a much higher cover (at least 5 times) than ULIPs. Also, by investing the balance in top-rated equity mutual funds, the returns derived from the combination are a minimum of 1.5 times the returns from ULIPs.
A brief comparison of the two options shows us:
|ULIPs||Mutual Funds + Term Insurance|
|Historical Returns||8% to 10% p.a.||12% to 14% p.a.|
|Lock-in||5 years||Usually no lock-in, except lock-in of 3 years for ELSS Funds|
|Tax on premiums||Tax deductible u/s 80C||ELSS premiums are tax-deductible u/s 80C.|
|Tax on redemption||Redemption proceeds are tax exempt u/s 10(10D)||No tax on redemption if held for more than 1 year for equity MFs.|
|Insurance cover||Very low||Much higher|
|Charges||Apart from fund management charges, other charges include:
||Only fund management charges|
Investors have a notion that their money gets lost in case of term insurance but you can see that investing in ULIPs gives a lower cover and lower returns whereas term insurance when clubbed with mutual funds gives a much higher death cover and higher returns.
So, whether your objective is insurance or investment, you would be better off investing separately for insurance and mutual funds to fulfill both objectives.
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