ULIP Vs Term Insurance And Mutual Funds: Which Is Right For You?

Whether life insurance coverage meets your demands for life insurance is the most crucial factor to consider. Term insurance is your most affordable choice if you are interested in risk protection.

ULIPs provide both insurance and investment options. ULIPs do have administrative costs. However, they start large and then decrease with time.

ULIP: What is it?

ULIPs, or unit-linked insurance plans, are insurance products that mix investment and risk management. A ULIP-holder makes recurring premium payments. A portion of the premium is invested similarly to a mutual fund scheme, and a part is used for life insurance. The sort of investment is up to the investor. Either equity or debt investments, or both, may be made. Investors have various options depending on their risk tolerance and financial circumstances.

Is buying a ULIP an ideal decision?

The structure of ULIPs has improved since they were first developed. But for a wise investor, buying term insurance and investing in mutual funds still makes more sense. Separating investments from insurance is preferable.

Before making judgements about tour investments and insurance, consider the following:

  1. Choosing the suitable mutual funds for your risk profile
  2. Presently available insurance
  3. Number of Dependents on Income
  4. Investing objectives and time frame

Three years are required for life insurance policies (other than term plans) to reach the paid value. This indicates that the insurance policy cannot be relinquished as cash until three years’ worth of premiums has been paid. In the case of a ULIP’s tax benefits, the policyholder has three years to stop making premium payments, but the insurance coverage will still be maintained.

The policyholder must still pay for the cost of that insurance coverage. The mandatory units are liquidated yearly, and the insurance cover costs are subtracted from the fund value. The corpus value would be sufficient to cover the cost of the insurance coverage each year after three years of annual premium payments.

Therefore, insurance firms demand that a minimum balance be kept. The fund must include at least Rs. 50,000. You won’t be required to pay a premium for the remainder of the term insurance if it performs effectively and generates enough revenue to cover the insurance coverage annually.

Mutual Fund vs ULIP

Let’s examine the distinctions between a ULIP and a mutual fund programme.

ULIPs Mutual fund
They are insurance and investment products.

Depending on their age, ULIP investors are given a sum assured of around 7 or 10 times the annual premium and can invest in several different investment options.

Investors have various investment options, including government, corporate, and money market securities. They don’t offer insurance protection.
ULIPs give investors a variety of investing possibilities.

You can change from a debt-focused choice to an equity-based one (change without affecting ULIP tax benefits).

A mutual fund scheme typically adheres to one of three themes: sectoral, balanced, or equity. To a certain degree, the allocations are predetermined.
The plan holder can take money out. Typically, a minimum withdrawal threshold applies. A fee will be used. Before the policy’s maturity date, the entire procedure may be withdrawn, subject to a surrender fee, and in some situations, tax. Diverse mutual funds have various exit strategies. Many schemes charge an exit load (cost) if the investor withdraws within a predetermined time frame (usually a year). Compared to ULIPs, mutual funds are far more liquid.
Investments made through ULIPs may qualify for Section 80C tax incentives. ULIP maturity receipts are regarded as being tax-exempt. Equity Funds: If you exit within a year of investing, capital gains tax may be due.

Debt Funds: Withdrawals are subject to taxation at your income tax rate if made within three years.

After three years, withdrawals are subject to a 10% tax without indexation or a 20% tax with indexation.


Premium Allocation Charges, Policy Administration Charges, Mortality Charges, Fund Management Charges, and Surrender Charges are just a few of the costs that make it expensive. There are typically three different costs: transaction fees (one-time fees your bank or advisor may impose), fund management fees, and exit loads. Only if the investment is removed before a specified term is the exit load applicable (usually one year)
The premium must be paid regularly or all at once. Mutual fund investments can be made at any time or as part of a monthly SIP.


Note: Budget 2020 came with an announcement of a new tax regime with more tax slabs and lower tax rates. It differs from the existing tax regime, which comes with many deductions and exemptions. For tax benefits from ULIP, policyholders must choose the correct tax regime.


In ULIP, you cannot receive the same level of flexibility and choice that you can in a mutual fund. There is still room to cut costs in Mutual Funds and ULIPs. The tiring thing about ULIPs is the commission structure, which is still front-loaded (more so in the first few years).

‘Insurance is the subject matter of solicitation. For more details on benefits, exclusions, limitations, terms, and conditions, please read the sales brochure/policy wording carefully before concluding a sale. ‘

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