ULIP vs Term Insurance: Understanding Features, Returns and Risks

Selecting the appropriate life insurance plan is a very important financial decision, and the ULIP vs term insurance debate can often leave the buyer confused. It is very important to understand the difference between term insurance and Unit Linked Insurance Plans (ULIPs) because these two plans are used for two completely different purposes, one is purely for risk coverage, while the other is a combination of risk coverage and investments.

What is Term Insurance?

Term insurance or Term Plan is life insurance that offers your family pure financial protection for a fixed time period, known as the ‘policy term’. If the policyholder dies within the policy term, the insurer pays the claim amount to the nominee. If the policyholder outlives the policy term, no maturity benefit is payable.

What are Unit Linked Insurance Plans (ULIPs)?

Unit-linked insurance plans, more popularly known as ULIPs, are Life Insurance solutions that provide the dual benefit of insurance protection combined with market-linked investment. A portion of the premium paid by the policyholder is used to provide life cover, while the remaining portion would go into investment through equity, debt, or hybrid funds in financial markets.

ULIPs provide an opportunity to be a part of the growth process while securing the financial future of the family, with returns based on the performance of the chosen funds and market risks. Over the years, the IRDAI has made changes to increase the transparency of ULIPs by setting a cap on charges and making it mandatory to have a five-year lock-in period for ULIPs.

Key Features of Term Insurance

This type of insurance provides a sense of financial security to the beneficiary or the nominees in case of untimely death. Since other forms of insurance also include investment benefits, there is practically no other form of insurance that is as affordable as Term Insurance.

• Pure Life Cover: Term insurance is a pure protection plan, without any savings or investment element. The entire premium payment is used to create a provision of finance for the nominee in case of the death of the policyholder during the policy term.
• Higher Sum Assured at Lower Cost of Insurance: One of the major advantages of term insurance is that it is possible to obtain a high life coverage at a relatively low cost of premiums. This facility is very useful for young individuals and families who want to have ample life coverage within their fixed budgets.
• Fixed Policy Term: The Life Insurance plans are also issued for a certain period, like 10 years, 20 years, or 30 years, or till a certain age is attained. The life insurance coverage can only be enjoyed for this particular period, which is selected beforehand.
• Death Benefit to Nominee: In cases of untimely death of the policyholder during the policy period, payment of the sum assured to the nominee is made by the insurance company.

Features of Unit-Linked Insurance Plans

The unit-linked insurance plans are abbreviated as ULIPs, which guarantee a life cover and have investment prospects that are market-linked. The premium is partly used to cover life, and the rest is either invested in equity or debt, or balanced funds. Knowing important characteristics of ULIPs is necessary to enable the policyholder to judge whether ULIP can help create wealth in the long term or to cover risks.

• Dual Benefit of Insurance and Investment: ULIPs provide life insurance coverage along with the ability to build wealth by investing in market-linked pools of money, thus being a hybrid product.
• Market-Linked Returns: The returns on ULIPs are subject to the performance of the underlying funds selected by the policy owner. These underlying funds could be equity, debt, or hybrid funds.
• Long-Term Investment Horizon: ULIPs are good for long-term investments that lock away money for at least 10 years, like saving for retirement, sending your child to school, or building wealth.

Difference Between Term Insurance and ULIP

The only difference between term insurance and ULIP lies in their aim. Term insurance intends to provide financial security at an affordable cost, while ULIP aims to provide insurance along with market-linked investments to customers with specific requirements. The choice of term plan vs ULIP arises on the basis of financial goals.

ULIP vs Term Insurance: Which Is Better for Your Financial Goals?

In deciding on buying term insurance or ULIP, an individual needs to consider their financial objectives, risk tolerance, and the level of coverage required. Nonetheless, high-premium ULIPs must be considered since there is a new capital gains tax being applied as of 2026.

• Buying a Term Plan if Protection is Your Priority:  Term plan is ideal when your primary objective is securing your family’s financial future.
• Consider a Term Insurance Plan for Low Risk and Simplicity: Term insurance requires no market-related investments and is thus quite transparent and straightforward for those individuals who prefer to play it safe and do not want any risks associated with investments.
• Purchase a ULIP if you are looking for Insurance along with Investment: A ULIP is beneficial for those who want to link life coverage with wealth creation.
• ULIPs With More than One Investment Option: Since the returns in ULIPs are market-linked, they are more appropriate for people who are comfortable with market risks and long term commitments.

Frequently Asked Questions (FAQs)

Is ULIP good or Term Insurance?

For pure insurance coverages, term insurance is more appropriate. ULIPs are appropriate for longer-term investment schemes coupled with insurance.

What are the prime advantages of purchasing a ULIP plan?

ULIPs provide life insurance coverage, along with returns that are market-linked, and flexibility to choose or swap funds. ULIPs have been favoured over traditional ones.

Are ULIPs giving better returns on Investments in comparison to traditional savings plans?

ULIPs may provide better long-term yields than conventional schemes, but their yields are market-linked, that is, they are not guaranteed.

What is the difference between ULIP and normal Insurance?

ULIPs involve both investment and insurance, while conventional insurance involves either protection or guaranteed savings.