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Difference Between Term Insurance, ULIPs and Mutual Funds

Updated On Aug 12, 2021

Investing is the way of distributing resources, usually money, in the hopes of making a profit or producing an income. As more and more people learn about the benefits of long term investments, insurers develop different types of plans with unique and attractive features. Today, let us talk about 3 such plans: term insurance plans, unit-linked insurance plans, and mutual funds, which are provided to the masses. Till the end of the article, you will learn about these plans and what makes them different from each other. 

What is a Term Insurance Plan?

A term insurance policy is acquired for a set length of time, after which the recipient receives death benefits if the life assured passes. In order to avoid policy termination before the plan's contract ends, an affordable premium amount is paid to the insurance provider under this plan. The plan, however, does not provide maturity benefits to the life assured if he/she lives till the end of the policy term.

What is a Unit Linked Insurance Plan (ULIP)?

Unit-Linked Insurance Plans (ULIPs) are insurance policies that provide investors with both insurance and investment opportunities. They differ from traditional insurance plans as they offer higher returns by investing in a variety of asset classes. The insurer invests a portion of your premium amount in debts, equity, mutual funds, and bonds based on the life assured's preferences. At the same time, the remainder is set aside for life insurance.

What is a Mutual Fund?

Mutual funds are a type of financial trust in which money is pooled from a number of different individuals and then invested in a variety of market-linked funds. These pooled investments are managed by a fund manager, who is usually a financial specialist. This investment option provides investors with access to a professionally managed portfolio. The fund manager's principal goal is to maximise returns.

Difference Between Term Insurance, ULIPs and Mutual Funds

Here's a full comparison of term insurance, unit-linked insurance with mutual funds to help you decide which is the better option for you.

  • Purpose - A term insurance plan is purely protective, providing just life insurance, whereas a unit-linked insurance policy offers both life insurance and investment options. Mutual funds only offer exclusive investment opportunities.
  • Money Allocation - The premium paid for a term insurance plan is used to provide life coverage. In contrast, a portion of the premiums paid for unit-linked insurance plans is used for insurance coverage. The remaining amount is invested in funds according to the life assured's preference. The mutual fund premiums are used to invest in funds.
  • Ideal For - A term insurance plan is suitable for the family's primary earner to assure financial security after his/her death. ULIPs, on the other hand, is best suited for those seeking long-term high returns as well as life insurance. In contrast, mutual funds can be bought exclusively for fulfilling your short-term or long-term financial goals.
  • Ideal Tenure - You can calculate the period after which your dependents will no longer require financial protection before purchasing a term insurance policy. A ULIP can be purchased for a period of 10 to 15 years and provides substantial investment returns. Depending on your goals, you can invest in a mutual fund for a short, medium, or long period.
  • Returns - A term insurance policy does not offer investment returns due to lack of such opportunities. However, death benefits are paid to the beneficiary when the life assured dies before the policy term completion. ULIPs offer returns that are influenced by market performance as well as the amount invested. In contrast, investing in equity mutual funds provides good returns, whilst debt mutual funds give moderate to poor returns.
  • Switching - Switching a term insurance policy is not possible; however, you can switch with the fund options available in a unit-linked insurance plan for a charge. On the other hand, since you can't switch between mutual funds as well, they are pretty inflexible. 
  • Lock-In Period - A term insurance plan has no lock-in duration and must be renewed each year, whereas a ULIP has a 3 to 5-year minimum lock-in period. Apart from the three-year lock-in term for tax-saving ELSS schemes, conventional mutual funds have no lock-in time.

Take Away

Each of the three options is created to serve a different purpose. Hence,  it is prudent to purchase the most suited plan for your financial needs as well as your family's future goals and aspirations. You can also seek the advice of a financial counsellor or an insurance agent to help you make a great financial decision.

Also Read:  Life Insurance V/S Health Insurance V/S Term Insurance

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Disclaimer: This article is issued in the general public interest and meant for general information purposes only. Readers are advised not to rely on the contents of the article as conclusive in nature and should research further or consult an expert in this regard.

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