Are ULIPs as good as mutual funds plus term insurance?

It is common to find agents pitching an investment-cum-insurance product to you. Have you ever wondered if it really offers the best of both worlds, or is there more to consider? 

Let’s take a closer look at how these options work:                  

ULIP (Unit Linked Insurance Plan)

ULIP combines insurance & investment, allocating part of your investment to life cover & the rest to equity, debt, or hybrid funds, providing market-linked returns, just like mutual funds.

Term Insurance

Term Insurance is a pure life insurance policy for a specific period. If you pass away during the term, your family gets a lump-sum as specified in your policy.

Mutual Fund

A mutual fund is an investment instrument where your money is put into stocks, bonds, or other assets. You earn returns based on how these investments perform.

Let’s Compare with Real Numbers

Rahul plans to invest  ₹1,80,000 p.a. in ULIP.

Here’s how it turns out:

Note: GST(18%) applies to charges, not on the premium. Here, ₹1,985.40/year (₹165/month) is GST on charges, added separately to the annual premium and borne by the investor.

On top of it, he gets a life cover of ₹18 lakh, sounds cool, but the cover might not be enough.

So, Rahul plans to compare it with an investment in Mutual fund and Term insurance separately:

Note: When you invest ₹1.8 lakh annually in a ULIP, only ~93.87% of your money gets invested, while ~6.13% goes toward charges. 

Rahul finds out:

While both ULIPs & MFs can generate similar gross returns, ULIP has high costs and a lower life cover, while Mutual Funds + Term Insurance offer better flexibility & protection.

Conclusion

Investment Perspective:

While we assumed the same returns, ULIPs typically deliver lower returns (8-10%).

The tax-free maturity is a plus, but the mandatory lock-in reduces flexibility and the high charges take away a significant chunk. Mutual funds on the other hand offer better liquidity, minimal charges and potentially higher pre-tax returns. 

Life Insurance Perspective:

ULIPs are typically sold as an insurance product instead of an investment product. But, the life-cover in ULIPs? It’s often too low to replace proper term insurance. 

Just think about it:

An annual investment of ₹1.8 Lakhs gets you a life cover of only 18 Lakhs, whereas at only 12,000 p.a. You could get a life cover of 1 Cr. for the same term. Also you can invest the rest 1.68 Lakhs in any Mutual Fund and enjoy higher returns than ULIPs!

We don’t want to pick sides, but hope you already know which option you should opt for ;)

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