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