Does ULIP really deliver what it promises? or Is it advisable to keep investments and insurance separate by investing in Mutual funds and buying a Term Insurance for life insurance coverage? Lets explore answer to this question in this article.
Recently one of my client references approached me to evaluate his investments done via an insurance policy. This happened to be a Unit Linked Insurance Plan (ULIP), assuring of both market based returns and life insurance both bundled in a single product.
For those who do not know what ULIP’s are, this is a product which provides dual benefits of Insurance and Investments. Unlike traditional insurance savings or endowment policies, the amount here is invested in financial securities and the return from the same is not guaranteed and will vary with the equity or the debt market.
While in the past ULIP’s were notorious famous for charging allocation charges to the tune of almost 30-40% of the premiums paid by the investor, in recent days the same has reduced to around 5 to 12%, which is still high in comparison with other similar products.
What prompted me to write this blog is a quick analysis which I did to analyze the impact of charges levied in ULIPs on the end maturity amount Vs buying term insurance for the insurance coverage and using mutual funds for investments.
For the comparison purpose, we have used the numbers from the illustration table of ULIP and have taken the returns at 8%.
ULIP Details
| Age of the Insured | 30 |
| Insurance Amount | 1.5 Crores |
| Yearly Premium Amount | 1.8 Lakhs |
| Premium Payment Term | 5 |
| Policy Tenure | 40 |
ULIP at the end of 40 years will result in a maturity amount of 52 lakhs at 8% as the gross investment return as per the illustration.
Alternate Investment and Risk Management Option
Consider buying a Term Insurance for 40 years which will cost around 28K per annum as premium and invest the difference in Equity mutual funds.
This approach will ensure you have sufficient amount of life insurance coverage for the next 40 years and also the amount invested in mutual funds helps in creating wealth for yourself in future.
Before getting into the conclusion, lets take a quick look at the primary difference between both options.
Difference between ULIP and Mutual Funds + Term Insurance
| Details | ULIP | Mutual Funds + Term Insurance |
| Mortality, Morbidity Premium | Increases every year | Stays flat for the whole policy tenure |
| Fund Management Charges | 1.25 – 1.35% | 0.5-0.6% (Direct Funds) |
| Allocation Charges | 5 – 12% | 0 % |
| Tax during investment period | 18% on Morality Charge, Premium allocation charge & Fund management charges every year | 18% GST on Mortality Charge 0.001% SST on Mutual Fund Investment |
| Tax at time of withdrawal | Exempt if premium is within 2.5L per annum | LTCG – 10% STCG – 15% |
| Liquidity | Lock in period of 5 years | No Lock in (except ELSS and Solution based funds) |
One point, which intrigued me while checking the mortality, morbity charges is the fact that during the initial years, charges were hardly around 13K and towards the end of the policy tenure same went upto around 3.11 lakhs. Whereas the term insurance premium remains constant from Year 1 till Year 40.
Final Result – ULIP Vs Mutual Fund + Term Insurance
For this article, I am not going to look at the 13-15% returns which the Nifty or Sensex has delivered over the past 15 years and I would go with the 8% return which the insurance policies show in the illustration document, as our intention is to understand the impact of charges on the amount which an investor can generate at the end of the investment period.
| ULIP Return at the end of 40 Years | 52 Lakhs (No tax liability) |
| Mutual Fund Return at the end of 40 Years | 82 Lakhs (After deducting LTCG Tax) |
The numbers speak louder than words. Investing through mutual funds and purchasing a term insurance cover for life insurance coverage is always a better option.
You might also want to watch a video which we have created highlighting some of the mistakes done while buying a term insurance policy. You can access the same using the below link.
Please let us know if you found this article useful by leaving your comments below.
*Mutual Fund Investments are subject to market risks. Please read the offer document before investing.
If you are looking out for assistance in investing in Mutual Funds or want to purchase Term Insurance policy, we are just a phone call away.
Awesome article stating to keep Insurance (risk protection) and investment separate from each other as per their core objectives