Currently, insurance companies offer a wide range of insurance policies. There are term plans that are simplest to understand and offer life cover for a specific period of time.
The term plans act as an income if the sole breadwinner of the family passes away during the tenure of the policy. In this, the overall premium money is kept for life coverage purposes.
There are also ULIP plans which are unit-linked insurance plans that cover both insurance and investment aspects. In unit-linked insurance plans, a portion of your premium is invested in equity, debt or a combination of both as per the risk appetite, and another part is used for purchasing a life cover.
With this arises the most confusing question, should one buy a ULIP plan? Or should one keep things separate, buy term insurance, and invest in mutual funds for investment purposes?
Let’s compare various parameters and find out!
1. Performance of the portfolio
In case you have purchased a standalone term life insurance and invested the remaining amount into equity mutual funds, how are you going to compare that data with a unit-linked insurance plan?
If we take a look at historical data, then it depicts that equity mutual funds outshine equity portfolios of unit-linked insurance plans. This stands true for all the categories like small-cap, mid-cap, large-cap, and multi-cap across various time periods. In all the sectors, top-performing mutual funds gave more returns than ULIPs.
2. Cost of Mortality
Mortality charges are applied for life insurance depending on age, health, and various other factors. Generally, insurance companies use a standard table for applying these charges. Moreover, these mortality charges remain the same irrespective of which insurance you choose to buy – ULIP or term insurance plan.
If you choose a ULIP plan, then you must buy a policy that is at least seven times your annual premium. This is the new IRDAI guideline. Thus, even if you previously owned a life cover or not, you will be offered an extra life cover whenever you buy a unit-linked insurance plan.
3. Lock-in Period
Unit-linked insurance plans are present for a minimum of five years. This naturally entails a lock-in term of five years. The insured person cannot liquidate the fund value during the lock-in period.
If you choose to surrender or discontinue your ULIP policy before this period, then you will receive penalties. Your invested money will be returned to you only after the lock-in period. As for mutual funds, they don’t have such lock-in periods. Except for Equity Linked Savings Scheme (ELSS) funds. While exit loads are applied in some cases, those aren’t more as compared to ULIPs.
Conclusion
It is recommended by the experts that you must keep both insurance requirements and investment requirements separate from each other for getting the best out of each of them individually. You can choose to buy a term insurance policy to secure your life and invest in mutual funds as per your end financial goal and your risk appetite.
Keeping them separate will make your life easier and less complicated, and you will get to enjoy more returns on your funds comparatively.
