I am told that a Ulip will cover me for Rs 30 lakh for premium of just Rs 50,000 a year. I have to pay premium for at least three years and maintain a corpus value of Rs 50,000. Is that better than a combo of a term plan and mutual funds?
— M Kannan, Porbandar
How they compare | |
| ULIPS | Term Plan + Equity Mutual Funds |
• High initial charges; up to 30% of premium • Recurring charges of 1% a year • Tax-free income • Section 80C tax benefits on premium paid • Freedom to switch between equity and debt • Premium must be paid every year for at least three years • Either fund value or insurance cover payable; higher premium if both are paid | • Nil or low entry load on mutual funds • Mutual fund recurring charges 2-2.5% a year • Tax free only if holding period exceeds a year • Tax benefits only for term plan, ELSS funds • Switching could result in tax liability • Only term plan needs to be renewed; no compulsion in mutual funds • Nominee gets cover amount and fund value |
The most important thing to look for in a life insurance policy is whether it addresses your life insurance needs. If you are looking at only risk cover, term insurance is the best and cheapest option for you. Ulips offer a combination of insurance and investment. However, Ulips come with administrative charges, which are high in the initial years but taper off with time.
Life insurance policies (other than term plans) need three years to attain a paid-up value. This means that only after three years’ premium has been paid can the policy be surrendered for cash. In case of Ulips, the policyholder can stop paying the premium after three years but the insurance cover would continue.
However, a policyholder still has to pay for that insurance cover. The charges for the insurance cover are deducted from the fund value every year by liquidating the required number of units. After three annual premiums have been paid, the corpus value would be big enough to pay for the insurance cover every year. So, insurance companies insist that a minimum balance is maintained. You need to have at least Rs 50,000 in the fund. If it performs well and earns enough to pay for the insurance cover every year, you don’t have to pay premium for the rest of the term.
But if the fund makes a loss and the value falls below Rs 50,000, you may be required to replenish it. Failure to do so may end the policy. Some companies also reduce the cover to keep the policy alive. Do keep in mind that in most Ulips, the policyholder (or his nominee) gets either the fund value or the sum assured, whichever is higher. Some Ulips give both the fund value as well as life cover, but their premium is higher.
Suppose someone has a cover of Rs 5 lakh and after 15 years of investments his fund value rises to Rs 5.5 lakh. If the policyholder dies, his nominee will only get Rs 5.5 lakh. Even after the fund value exceeds the insurance cover, risk cover charges are deducted. So, policyholders pay for something they don’t get. Going by the premium and insurance cover you mention, we assume you are about 27 years old. The cover options before you are as follows:
| Policy | Life Cover | Tenure | Premium |
| Ulip | Rs 30 lakh | Whole life | Rs 50,000 a year |
| Term plan | Rs 30 lakh | 30 years | Rs 9,000 a year |
| Single premium term plan | Rs 30 lakh | 15 years | Rs 75,000 (one-time) |
