1. ULIP or 2. term insurance plus mutual fund investment: Which is Better?

Are ULIP products the best to invest in? Find out.

Thanks to a lot of sales push, you must have, at some point, been coaxed into buying a unit linked insurance plan (ULIP). As the super-friendly insurance agent would tell you, these plans combine the best of both worlds by taking care of your insurance as well as investment requirements. And don’t we as busy people always yearn for that quick solution? In this article, let us see how good this bundled solution is for your finance & whether better solutions exist.

What is ULIP, how does it work and its limitations

A ULIP is an insurance product that has an investment clause too. So, say you pay Rs. 10,000 as an annual premium for a ULIP policy. Here, Rs. 1,000 will go towards “mortality charges” (i.e. charges for your life insurance cover) and the rest Rs. 9,000 will go towards investment in an in-house mutual fund of the insurance company. Sounds good till now, however, following are the limitations of a ULIP policy:

• The amount of life insurance cover that you get in a ULIP for a given premium is very low. If you carefully analyse your life insurance requirement & come to realise that you need Rs. 1 crore insurance cover, and try buying a ULIP policy for that, the premium will certainly be out of bounds for you.
• Even if you try to evaluate ULIP from a purely investment angle, the real killer are the myriad charges like premium allocation charge, policy administration charges, switch charges etc. that reduce the overall return from the investment.

So, long point short: the product design of ULIP product is such that it fails to address any of your requirements properly be it insurance or investment. In this context, the question is: Is there a better alternative to ULIP for investing your hard earned savings?

Term Insurance + Mutual Funds: A better option

Answer is YES! Instead of bundling your requirements in a ULIP, you can decide to keep insurance and investments separate and follow the below given approach:

• Buy Pure Term Insurance for your insurance needs:

  Calculate how much insurance you need and buy a pure term insurance, period! This ensures that you pay only for the risk cover. Now, because this is a pure risk cover, there is no “investment” involved in the premium amount (and you don’t get anything on maturity), the premium is a fraction of what you pay in a ULIP. Which otherwise means that for the same amount premium, you get a MUCH higher life insurance cover. Isn’t that great?

• Invest your savings in Mutual funds:

  Unlike complicated and expensive ULIPs, mutual funds are among the simplest and lowest cost investment products. Mutual funds are well suited for retail Indian investors. Over a long term , low charges contribute to higher returns. Also, unlike ULIPs, mutual fund is very flexible which allows you to shift from one scheme to another effortlessly, in case of drop in performance etc.

Always remember:

There are some things that just don’t go together. Insurance and investment are like that. Mixing them through ULIPs is not such a great idea. Buy large enough pure term insurance for your life insurance requirements. As for your savings, invest consistently in good mutual fund schemes.

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