An endless debate within the overall topic of insurance is – whether to go for ULIP or Term insurance plans in India. Lot many theories have been floated around for and against both of them. Both are important in their own right but to put them in perspective, lets first understand what each of them really mean.
What is Term Insurance Plan
Term Insurance Plans are a basic insurance plan, the real insurance plans. This plan is an agreement between an individual and an insurance company, that in lieu of certain specific sum of money (in this case, premium) and for a certain specific time period (say 25 to 30 years), an insurance company will compensate the nominee of the individual for a specific amount (known as Sum Assured or Death benefit – which may be 25 lakhs or 50 lakhs). If that individual outlives that specific tenure, policy will end and insurance company will not return anything at that time. Term Insurance Plans in India normally costs around Rs 8000- Rs 15000 for many insurance companies as annual premium rate for a 30 year man for a sum assured of Rs 1 Crore
What is ULIP
ULIP stands for Unit-Linked Insurance Plan. This plan is more or less an investment tool with a dash of insurance thrown in. How this plan works? Whatever premium you pay to the company, company after deducting its fees and charges invest the remaining amount in the market, and according to the market performance provides return (fund value to the policyholder). So it’s a kind of win-win situation for the investor. If he survies, he will get fund value and if he dies, his nominee will get Sum assured.
Now when the basics are clear, let me say that comparing an apple with an apple would be appropriate rather than comparing an apple with mango and so is the case with Term plan V/s ULIP.
ULIP can never Offer you High Life Cover
A ULIP can never offer you the kind of sum assured which you can get in pure term insurance plan for a peanut’s cost. Let me quote you an example from Kotak Life Insurance. Mr Punit is a 30-year-old healthy non-smoker male opts for preferred term plan of 1 crore from kotak. Premium would be Rs 15,304 per annum for a term of 30 years. But he feels that it’s a foolish plan because if he survives 30 year term, he will not be getting 4,59,120 (30 x 15304).
If he opts for ULIP:
Instead he chose Kotak Life’s best ULIP plan by the name Ace Investment. Under this ULIP, to get the Sum Assured of 1 crore, his annual premium is Rs 6.55 Lakhs. If something happens to him during the term, his nominee will get Rs 1 crore; and if survives the term, he will get Rs 8.44 Crores. Which option looks more viable?
If he opts for Term Insurance:
First thing first, if Mr Punit opts for a Term Plan and survives the term, he will be losing 4.5 lakhs only (Rs 15000 * 30 Years), the rupee value equivalent of Rs 15,000 as of today. Because of all the inflation, this 4.5 lakh after 30 years will be able to help you out with monthly expenses of 4 to 5 months hardly. So its not a big deal after all even if he lose all the money.
Solution: Mix Term Plan with Mutual Funds
Now Let’s look at the situation from other angle. Because he is looking for returns too – let’s offer him a combo of TERM PLAN + MUTUAL FUND. As he has shown in example of ULIP that he has the capacity to pay Rs 6.5 lakh per year in lieu of life cover of 1 Crore or return of 8.5 Crore after 30 years; lets give him a life cover of 1 crore through life insurance term plans for premium of Rs 15,000 out of his total investible amount of 6.5 Lakhs, and invest the remaining 6.35 Lakhs in a SIP mode (Rs52,917 per month) in one of the best performing large and mid cap fund by the name of HDFC TOP 200. This fund has given a return of 24% since its inception in 1996. But we take a very conservative figure of 16% for calculation purpose. So Mr Punit investing Rs 52,917 in HDFC TOP 200 for next 30 years and his returning amount at 16% is 29.80 Lakhs and if the fund repeats the same performance as it has done for last 16 years, the resultant amount would be, please hold your breath – Rs 100.37 Crores.
Hope these figures clear up the debate. Its just that Mango has its own use and apple has its own. Take your pick according to your preferences: Term Insurance Plan or ULIPs
{ 4 comments… read them below or add one }
Hi Dhawal
firstly thanks a lot for such a simple explanation .. i understand that Ulips r def not the right way but what about MF for a beginner investor who doesnt know the ABC’S . i have nil idea abt MF but i have a heard a lot about HDfC top 200 but dont we have to keep a regular check on this and how would we know when to invest and when to pull out ..and how much is the minimun we should start of ….could u pl elaborate on this too …
THanks in advance
@Neetu,
Hello and thanks for your appreciation
I would not say that ULIPs are strict no-no for everybody under every circumstances but yes, mutual funds are more simpler way to go about for wealth creation..
..and the biggest advantage of Mutual Funds is that you dont need to ponder over too many things like in ULIPs (Policy administration charge – premium allocation charge – mortality charges etc).
For your convenience and better understanding, you can take Mutual Fund as a tool wherein a lot many people come together and mutually pool their money for a common cause (capital protection/capital appreciation etc), and hand over their money to an expert (Fund manager in this case), who use his professional expertise to generate profits for these investors..
HDFC TOP 200 is a very well-known market leader fund with a proven track record of 16 years..Its Mid & Large Cap fund which invests primarily into blue-chip companies of the stock market. You can start your investment journey in mutual funds with HDFC TOP 200. Minimum investment required for SIP (Monthly) mode is Rs 500 and lumpsum is Rs 5,000.
To derive maximum benefit, you need not to keep a regular check on your mutual fund investment. To reap the benefit of RUPEE COST AVERAGING and COMPOUNDING, keep your SIP going for at least 4 to 5 years. Dont feel that its too long a period. Do you keep on checking your LIC policy value every now and then, or for that matter your PPF a/c?? i know the answer is NO. So no need to keep track of your mutual fund investments regularly. Just select an old, established fund like HDFC TOP 200 and review them in an year or so..
Hope it helps you somewhat..
Keep visiting and keep sharing..
Hi Dhawal ,
Very nice article. i would like to know what is the present status of HDFC top 2oo in market?
I am sorry , the question is unrelated to the article.
regards,
dpm
Dear Devi Prasad Ji,
HDFC Top 200 is one of the market leader fund – have a track record of outstanding performance over a period of 15+ years. So i would not discount it as yet. I too have a SIP running in Top 200 and i have read and heard the views of fund manager. He says that prime weightage in this fund is on Banking sector, which is currently underperforming. But once the uncertainty goes out, i am sure Top 200 will again rise and shine..
My advice, keep running your SIP for some more time..