Term Insurance Vs ULIPs

Life is unpredictable and can take many unexpected turns. The key is to be flexible in your outlook and be prepared to take on new challenges. You can achieve this goal with the help of life insurance. It is a practical way of ensuring that you are well-equipped for the unexpected - allowing you to move forward in life with confidence. Life insurance is a contract between you and the insurance company where the insurer agrees to cover your financial risks in exchange for a specific fee. As part of this contract, the insurance company promises to pay a sum of money to your family members - if you pass away while the policy is in effect. Here -

• You are the ‘insured’ or ‘life assured’.
• The fee you need to pay to keep your coverage active is 'premium'.
• The money the insurance company will pay to your family to help them continue their lifestyle is the ‘cover amount’.
• The family members who will receive the money from the insurer are called 'nominees' or ‘beneficiaries’.

A life insurance policy is primarily designed to provide a valuable source of financial security to help your family meet their needs and dreams after you are long gone. Besides this, it also serves as an investment tool, enabling you to maximise your wealth and achieve your long-term goals, including retirement, children's education, weddings, etc. Life insurance plans come in many forms. Each variant offers a different type of coverage and protection to suit your unique needs. In this article, we will discuss two popular life insurance options - Term Life Plan and Unit Linked Insurance Plan - in detail.

What is Term Insurance

Term insurance provides a financial safety net for your family so they have the means to continue to live the lifestyle they are accustomed to even in your absence. It is a simple yet cost-effective way to safeguard the financial future of your family. It pays your family a sum of money in the event of your untimely demise during the policy period. This can help to lighten their load, allowing them to focus on healing rather than worrying about finances.

How Does It Work?

Term insurance provides coverage for a defined period in exchange for a specific premium amount. If you pass away while the policy is active, the insurance company will pay a sum of money to your family. With this amount, they will be able to cover their needs and goals comfortably, allowing them to feel secure and safe in the wake of your passing. However, it's a pure risk cover, so you will not receive any benefits, if you survive until the end of the policy term. Example: Rohit, 30, lives with his wife and his 5-year-old daughter. He wants to secure their future, so he decides to buy a term insurance policy with a sum assured of Rs. 1 crore. He chooses the policy duration to be 30 years. And, he appoints his wife, Rachel, as his nominee. ➔ Scenario 1: If Rohit passes away in the middle of the policy tenure, The insurer will pay a sum of Rs. 1 Crore to Rachel.

➔ Scenario 2: If Rohit survives until the end of the policy duration. His policy will terminate and he won’t be paid anything.

What Is A Unit Linked Insurance Plan?

A Unit Linked Insurance Plan, or ULIP, is a type of life insurance that combines both investment and insurance. It gives you the chance to invest in market instruments while also providing life insurance coverage for your loved ones. So, it provides a unique advantage - the opportunity to both protect your family and grow your wealth at the same time. If you pass away while the policy is in effect, your nominee will receive a sum of money called the death benefit. It can be an invaluable source of support for your loved ones at a difficult time, protecting them from financial hardship in your absence. And, if you survive till the end of the policy term (that is, till it matures), the maturity amount is paid to you.

How Does It Work?

Like any other policy, you must pay the premiums on time every year to keep your coverage active. The money you invest cannot be withdrawn during a lock-in period of 5 years from policy purchase. Therefore, it is essential to understand that ULIP is a long-term commitment.

👉What happens to the money you invest in ULIP?

A portion of the premium you pay goes toward providing life insurance coverage and the remaining portion is invested in market instruments.

👉Where is this money invested?

The insurance company offers different types of funds under ULIPs and you can choose one that best suits your needs, life stage, and risk tolerance. After you decide on the product, the fund you want to invest in, and the amount you wish to invest, you begin paying the premiums.

The money invested in your chosen fund is converted into units based on the Net Asset Value of the fund on that particular day. Net Asset Value or NAV is the market value of the fund you are investing in on the date of the investment. It changes every day. Please note that the entire amount you pay as a premium is not invested in funds. The insurer will deduct certain charges to manage the fund.

Benefits Provided By A ULIP

A ULIP is a blend of insurance coverage and an investment component. So, it gives you maturity and death benefits.
➔ Maturity Benefit
If you survive till the end of the policy term, you are paid the maturity amount. It is the fund value at the time of policy maturity. The Fund Value is the market value of the total number of units you own with the insurance company on a particular day.
Fund Value = NAV x Number of units you own Please note that your policy will end once the maturity benefit is paid out.
➔ Death Benefit
If you pass away while the policy is in effect, your nominee will receive a death benefit. It can be either the sum assured or the fund value, whichever is higher, or the sum assured plus the fund value.
Example: Kailash, 30, buys a ULIP in March 2023 to save funds for his son's higher education. He chooses the policy duration to be 25 years and needs to pay an annual premium of Rs 1,20,000. The insurer deducts Rs 4000 as charges. So, the investable amount per year is Rs 1,16,000. He appoints his wife, Nora, as the policy nominee. As per the policy -

• Death benefit = Either the Sum Assured or the Fund Value on the day of his death, whichever is higher.
• Maturity benefit = Fund Value as calculated on the date of the policy maturity.

Let's say that the NAV of the units was Rs 500 when Kailash bought the policy - Total Units = (Amount Invested - Charges)/Net Asset Value = (1,20,000- 4000)/500 = 1,16,0000/500 = 232

➔ If Kailash survives the policy period Assuming that he accrues another 1800 units from the premiums he invests over the 25-year term of the policy.

So, the total units accumulated till 2047 = 232 + 1800 = 2032 units Let’s imagine that the NAV on the day of policy maturity is Rs 700. Therefore, maturity amount = NAV x Owned Units = 700 x 2023 = 14,22,400 So, Kailash will receive Rs 14,22,400 as the maturity amount in 2047. After that, the policy will come to an end. ➔ If Kailash passes away during the policy period As mentioned before, the death benefit will either be the sum assured or the fund value, whichever is higher.

Assuming that the sum assured is 10 times the annual premium. So, Sum Assured = 10 x Annual Premium = 10 x 1,20,000 = Rs 12,00,000

The fund value is calculated on the basis of the Net Asset Value and the units that have been accrued. Assuming that the NAV on the date of his demise is Rs 700 and he accrues another 1000 units from the premiums he invested till the date of his passing away. Total units accumulated = 1000 + 232 =1232

So, Fund Value on that particular date = NAV x Owned Units = 700 x 1232 = Rs 8,62,400 Since the Sum Assured is higher than the Fund Value, Nora will receive Rs 12,00,000 as the death benefit.

Term Insurance Vs ULIP

Let’s understand the difference between term plan and ULIP in terms of various aspects -

ULIP or Term Plan - Which Is Better?

Term Life Insurance Policies and Unit Linked Insurance Plans (ULIPs) have varying features and serve different purposes. Knowing the difference between term plans and ULIPs allows you to make an informed decision and maximise the benefits of your life insurance policy. With a ULIP, you have the opportunity to invest in market instruments as per your risk appetite, investment strategy, and financial goals. On the other hand, term plans provide your dependents financial security - should something unfortunate happen to you during the policy term. ULIPs are a great way to invest for wealth creation over the long run, while term plans are the best choice for those who have financial dependents. To make an educated decision, it is important to assess your specific needs, financial goals, and risk appetite. Once you have determined the right plan that fits your requirements, you can move forward and invest confidently.

Wrapping up!

The purpose of term insurance is to protect your family's financial future. ULIPs combine insurance and investment components, so you can provide financial protection to your family as well as build wealth to achieve your financial goals. Ultimately, the choice between term insurance and ULIP must be made based on your and your family's personal financial needs. Therefore, it is important to do your research to ensure that the policy you choose is worth the investment.