Difference between endowment plan, term plan & ULIPs - FGILI

Difference Between Term Insurance and ULIP

Insurance plays a significant role in reducing the aftermath of an uncertain adverse event, especially when it comes to life insurance, as your life affects all your near and dear ones. Ensuring the financial security of your dependents even in your absence is the role that life insurance plays. If you are considering opting for an insurance plan, these two insurance products can serve your purpose depending on your financial goals.

  1. Term Insurance

Term insurance is the purest insurance, primarily for investors looking to protect the financial future of their dependents after they pass away. Term insurance pays the assured amount to the nominee after the demise of the person insured. One of the term insurance benefits is that it can provide a higher sum assured at a nominal amount of premiums over the term of the plan. If you are looking for a decent life cover with a relatively low burden on your finances, term insurance is what you may prefer.

Benefits of Term Insurance

A higher sum assured with nominal premiums is the prime benefit that reduces the financial burden of the insured. One may also get optional coverage for accidental deaths and critical illnesses. Additionally, if the insured survives the policy term, the amount paid as premiums is refunded to the insured with the Return of Premium rider.

The premiums of term insurance plans are eligible for deduction under section 80C of the Income Tax Act, 1961. The amount of tax that can be saved depends on the premium you pay and the tax slab under which your income falls. However, the maximum amount of deduction allowed is Rs. 1,50,000. Both the death benefit and the refund of premium are exempted from tax under section 10(10D) of the Income Tax Act, 1961.

Moreover, term insurance taken at a relatively lower age, suppose around the 20s, comes with the most affordable premiums. This is because such investors are usually healthy when young, thereby reducing the risk of insurers.

To calculate the premium on the amount of sum assured, you can use the term insurance calculator. The basic details required are your date of birth, annual income, and whether you consume tobacco or related products.

  1. Unit Linked Insurance Plans [ULIP]

ULIP is a financial tool that provides insurance benefits along with wealth creation. Investors who want insurance protection and investment benefits, all under one instrument, may include ULIPs in their portfolios. The amount invested in ULIP by an investor is further invested in the equities.

Benefits of ULIP

ULIP serves as a tool to achieve your long-term financial goal apart from providing insurance benefits. ULIP provides good returns when held with a long-term perspective, which can become instrumental in your retirement planning, buying your dream house, marriage, etc.

ULIPs are most beneficial when opted for a long term, as the wealth generated after the compounding reaps its benefits. As the life cover usually covers a substantial portion of the insured’s life, the investor is most likely to get the compounding benefit if they start investing early in their life and take a plan covering decades.

Like term insurance, premiums of ULIPs are also eligible for deduction under section 80C of the Income Tax Act, 1961. Further, the maximum amount of deduction that an insured person can avail is up to Rs. 1,50,000. The returns that the policy provides to the investor on maturity are exempt from tax under section 10(10D) of the Income Tax Act, 1961.

New Tax Regime

Let’s assume the insured has selected the new tax regime for paying income tax under the Income Tax Act, 1961. In that case, the insured person will not get any deduction from their income for the premiums paid under term insurance or ULIP. This is because, under the new taxation regime, tax is charged at a comparatively lower rate for people earning up to Rs. 15,00,000. Therefore, certain deductions are disallowed, which also includes investments in these two instruments.

Conclusion

If you are looking to buy insurance to secure your family, you may consider the above two products.