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.
Let’s look at the features of the ULIP:
Term Insurance
Term insurance is a type of life insurance that provides coverage for a specified period, usually between 10 to 30 years. If you pass away during this period, your family gets a pre-decided amount (death benefit) from the insurer.
Let’s look at the features of the term insurance:
Mutual Fund
A mutual fund is an investment vehicle that pools money from many investors to invest in a diversified portfolio of assets such as stocks, bonds, or money market instruments.
Let’s look at the features of the mutual fund:
Let’s compare with real numbers
To understand how ULIP works in practice, let’s take the example of Rahul, who plans to invest ₹1,80,000 per year in a ULIP.
Here’s how his investment 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.
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So, Rahul plans to compare it with an investment in mutual fund and term insurance separately:
Rahul finds out:
There isn’t much difference in maturity values between ULIPs and mutual funds, but ULIPs come with higher charges and offer lower life cover, while mutual funds + term insurance offer better flexibility & protection.
Conclusion
Investment perspective:
In ULIP, 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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