PERSONALISED INVESTMENT MANAGERS

Understanding the difference between Term Insurance, ULIPs & Endowment Plans

01 July, 2021


          
            Understanding the difference between Term Insurance, ULIPs & Endowment Plans

A lot of people are still clueless about what they are buying into with life insurance, be it ULIPs or term insurance or money back/endowment plans. When buying life insurance, people hardly think more than the sum assured, premium and tenure of the policy. Most of them choose life insurance policies according to the perception of key influencers (family, friends and colleagues). Awareness and education about insurance products is very low in India.

The reason you buy insurance is to secure the finances of your dependents in your absence. It is not an investment vehicle to get returns. It is only a risk cover for death to ensure that the financial goals of your family are taken care of well even after you .
– Mimi Partha Sarathy

Endowment plans, ULIPs and term plans all guarantee you the death benefit or sum assured. Some endowment plans assure you returns based on the type of product. At the same time, returns on ULIPs are not assured or guaranteed. They are volatile but can give high returns over a long term because they are based on market performance of the fund. Also, with ULIPs, you have the flexibility of switching funds and tweaking your investment strategy with minimal hassle.

Endowment Plans

Endowment plans are among the most popular life insurance products in India because it combines the twin benefits of investment and life cover similar to a unit linked insurance plan (ULIP). However, it differs from a ULIP in several ways. When you invest in an endowment plan, you are getting life coverage as well as saving money for your retirement, children’s education and marriage, or a house. The policyholder’s family or nominee gets the sum assured amount on death of the policyholder. In case the policyholder survives the policy term, he gets the maturity amount plus any bonus accrued on the endowment plan.

Endowment plans give you financial protection of family against the policyholder’s sudden demise or permanent disability. They allow for savings based on important life goals such as retirement, house purchase, children’s marriage and education, etc.

Some other financial benefits also include tax exemption under section 80C and 10(10D) and you can get a loan against the policy in the event of any financial emergency

Returns of Endowment policies are usually very low because of the fixed returns with a high premium amount which has to be paid every year. It is more useful for those who do not have a large asset base as this is a good forced saving for major goals. Please check the returns and your financial goals before committing large sums every year for long period in endowment plans

ULIPs (Unit linked insurance plans)

ULIPs give you the triple advantage of insurance, wealth creation and tax-saving investment. In ULIPs the money that you pay as premium is partly invested on funds and partly on risk cover. Some ULIPs even allow you to choose the funds to invest depending upon your risk appetite and investment horizon.

While endowment plans and term plans offer you guaranteed returns on the death of the insured or after maturity, returns on ULIPs are not guaranteed but can be higher because they are based on market performance of the fund. Also, with ULIPs, you have the flexibility of switching funds and tweaking your investment strategy with minimal hassle.

But what is important is to understand the entry load costs, costs involved in managing the funds and the cost of insurance. Sometimes it may be better to just take a pure term policy and invest the balance amount directly in equity mutual funds for better returns. So please check these before you commit to ULIPs.

Term Life Insurance

This is one of the simplest and most cost-effective life insurance products. It provides life coverage for a specified tenure and if the policyholder dies, the sum assured is paid to the nominee in lump sum or as monthly pay-outs. Term insurance benefits from maximum coverage at the smallest premium amount amongst the three available options. The proceeds of a term insurance policy can be used to repay any debts you may have run up, pay for funeral costs, compensate for education costs for your kids and replace future income that your family would still need to lead a comfortable life.

Compared to a ULIP plan or endowment policy, a term insurance can provide your family more financial protection. However, it does not have the savings or wealth creation advantages of a ULIP or endowment policy.

Many times separating the two are more beneficial for you. You can cover your insurance needs by buying a pure term cover and your investment plan can include bonds, FDs and equity mutual funds which will give you better returns


Conclusion

Each one of them, with its own set of advantages and restrictions, can safeguard you from different risks and uncertainties. But it has also confused the buyer community to decide which policy best fits their needs. Read More

Have you worked out your family’s financial needs, for the period after you? Is your family covered for all eventualities? Do you need help in understanding how to get insurance to give you peace of mind instead of just a tax benefit? Which of the three options work best for you according to your life stage?

Reach out to us

We can help you understand how to maximise your investment goals or leave a comment below on your thoughts.

              


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