A sound financial plan is one that has sufficient insurance and investment layers. Be it any form of investment or insurance, there are several products available out there. Choosing the right one can be a daunting task, especially when each seems to offer its best to consumers. Every individual has different needs, and hence, it is important for one to choose an investment that serves their purpose. Here are the three popular financial instruments: ULIP, mutual funds, and term insurance explained.
A Unit Linked Insurance Plan (ULIP) is a market-linked product that is a combination of life insurance and investment. A ULIP offers double benefits to an individual as it provides the policyholder with a life cover and returns on their investments. It provides an individual with financial security, along with helping them achieve their financial goals. One can invest in any funds of their choice based on their risk appetite and goals. ULIP benefits individuals in the long haul, with compounding and flexibility of switching funds. It is directly linked to the market and, hence, when allocated effectively, it can offer great returns.
Term insurance is a simple type of life insurance where an individual gets a life cover for a fixed tenure. When you buy a term plan, you can choose the number of years you want a life coverage. If during the tenure of the policy, the policyholder loses their life, the nominee will get the sum assured. Since term insurances are for a fixed period, the premiums are usually low for huge sum coverages. Term insurance has become a popular way for people to secure the lives of their loved ones, with a term plan to provide sufficient cover without needingthe payment of hefty premiums. It is one of the most affordable life insurance types available in the market.
While ULIPs and term insurance plans are based on different types of life insurance, a mutual fund is simply a type of investment managed by fund managers. An individual can choose to invest in funds of their choice. The funds usually invest money in the stock market, bonds, and other money market instruments. Usually, mutual funds are a risky form of investment, as they are linked to the market and are volatile. There are also debt mutual funds that are safer but offer lower returns. The returns depend completely upon how your allocation is performing.
Key differences between ULIPs, term insurance, and mutual funds
Once you understand the three instruments, knowing the key differences between them will give you a better understanding of which one you should buy. Here are the differences:
- Primary purpose
ULIP is a type of life insurance that has an investment component attached to it. Term insurance is a simple form of life insurance for a fixed period. While a mutual fund is simply an investment.
ULIP benefits are dual since you get a life cover along with returns on your investment. Term insurance is an affordable way to provide financial security to your loved ones in your absence. A Mutual fund’s benefit is not fixed as the returns depend on the market and how your fund is performing.
- Tax exemptions
ULIP is designed in a manner where one can benefit from it on multiple levels. The premiums you pay for it and the amount you receive post maturity – both are exempt from any taxes. The premiums that you pay for term insurance and the life coverage a nominee receives are free from taxes too. Other than mutual funds specifically designed for tax savings, like Equity-linked Savings Scheme (ELSS), there are no tax benefits that they offer.
For an individual to make the best decision, it is important to understand where they are putting their money. Once you have understood what ULIPs, term insurance, and mutual funds offer, you can choose the one that meets your needs as an individual. ULIP is a straightforward choice if your aim is to get a life cover while earning returns on the side. While if you are looking for an affordable way to secure you and your loved ones, term insurance is a good choice. If you are simply looking for an instrument to invest in, mutual funds are an option.