When looking for a life insurance plan to protect your family’s financial future, you may come across different types of life covers available in the market. Choosing the right type of life insurance plan can be challenging, especially if you are not aware of the different types of plans and how they work.

Two of the most common kinds of life covers that may often leave people in such a dilemma are Term Insurance plans and Unit Linked Insurance Plans (ULIPs). If you have also been having a tough time making the right choice between these two options, we’ll help you out.

Let’s begin by first understanding what each of these life covers is and how they work.

What is Term Insurance?

Term insurance is the simplest kind of life insurance. It is also the most affordable. This is because a term plan is a pure life insurance cover. In other words, when you buy term insurance, you get your family covered in the unfortunate event arising because of your death. This means that in case of your unfortunate demise during the period during which the policy is active (aka the policy term), your nominee will receive the sum assured under the plan from the insurance provider. However, no financial payouts are typically made if you survive the policy term.

In the case of Term Plans with Return of Premium (ROP) alone, you will get back the premiums paid by you during the policy term.

In return for this life cover, you will have to pay a premium to the insurance provider. Typically, this premium is quite low because a term plan is a pure life cover. So, you can get a large cover of around ₹1 crore or more for just a few hundreds of rupees per month.

Let’s look at an example to see how term insurance works.

Say you purchase a term plan with a life cover of ₹1 crore that is valid for a period of 40 years. In return for this, you pay ₹500 a month to your insurer. Then, 37 years later, something untoward happens to you, leaving your loved ones without any financial support. However, since your policy is still active, the insurer will pay your nominee the sum of ₹1 crore. This can act as a safety net for your family and help them meet their daily expenses and their financial goals.

What is a Unit Linked Insurance Plan (ULIP)?

A Unit Linked Insurance Plan is also a Life Insurance policy where the customer gets something in return even if he survives the entire plan. The key difference is that it offers the dual benefits of insurance as well as investments. In other words, you can enjoy the advantage of a life cover while also simultaneously investing for your future with a ULIP.

The insurance component of a ULIP works like a term plan for the most part. You get a life cover that is valid during the policy term, and in case of your demise during this period, your nominee gets the death benefits guaranteed under the policy.

However, the investment part of the ULIP works like this. When you buy a ULIP, you can choose to invest your premium in a mix of different funds offered under the policy. These funds may be equity, debt, hybrid, balanced, and more. Your choice will depend on your risk profile and financial goals. Over the policy term, you can switch ULIP funds and change the assets you invest in as and when your risk profile or goals change.

At the time of maturity, you will receive the value of your investment corpus as the maturity benefit payouts. This is quite unlike a term plan, where no maturity payouts are offered.

Term Insurance vs ULIP: Which is the right option for you?

Now that you know how term insurance plans and ULIPs work, it will be easier to figure out which is the right option for you.

Ideally, here is when you should choose a term insurance plan.

  • If you are in your 20s or early 30s and have no dependents yet
  • If you already have substantial insurance coverage and want to expand your coverage affordably
  • If you want to give your family a financial safety net at cost-effective premiums
  • If you already have sufficient investments for your life goals

On the other hand, a Unit Linked Insurance Plan may be a better option for you in the following circumstances.

  • If you want to earn the dual benefits of insurance and investment under the same policy
  • If you want the benefit of long-term market-linked returns
  • If you want the flexibility to switch your investment funds as your risk profile changes
  • If you want to expand your insurance coverage and can afford a higher premium

Conclusion

Knowing which kind of life insurance plan to choose is crucial if you want to make an informed financial decision. Understanding how various life covers work is the first step in this direction. The details discussed above and the scenarios outlined should give you a better idea of when to choose term plans and when to choose ULIPs. The good news is that you can have both policies in your insurance portfolio if necessary.

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Disclaimer: This Article is for information purposes only. The views expressed in this Article do not necessarily constitute the views of Kotak Mahindra Bank Ltd. (“Bank”) or its employees. The Bank makes no warranty of any kind with respect to the completeness or accuracy of the material and articles contained in this Article. The information contained in this Article is sourced from empaneled external experts for the benefit of the customers and it does not constitute legal advice from the Bank. The Bank, its directors, employees and the contributors shall not be responsible or liable for any damage or loss resulting from or arising due to reliance on or use of any information contained herein. Tax laws are subject to amendment from time to time. The above information is for general understanding and reference. This is not legal advice or tax advice, and users are advised to consult their tax advisors before making any decision or taking any action.