Life insurance: Select among ULIP, term and endowment policies

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When buying life insurance, people hardly think more than the sum assured, premium and tenure of the policy. But there are lots of options before a person if he/she wants to buy an insurance policy. The three broad types of life insurance products are available in the market, i.e. ULIP, term insurance and endowment. You have to choose which one is the best fit for your needs. Money9 offers you a brief description of these products.

ULIP

Unit linked insurance plans (ULIPs) is a mix of both investment and insurance. One section of a ULIP premium is used to pay the insurance portion. The other segment is invested in a portfolio of investments divided into a variety of funds – equity, debt, and balanced. ULIPs can have a variety of funds, giving you a lot of flexibility.

ULIPs give you the triple advantage of insurance, wealth creation and tax-saving investment. Unlike term or endowment plan, returns on ULIPs are not guaranteed but can be higher because they are based on market performance of the fund. Also, with ULIPs, you have the flexibility of switching funds and change your investment strategy.

Like other insurance policy, ULIP also is tax efficient under section 80C and 10D of the Income Tax Act.

Term Insurance

A term life insurance policy is one of the simplest and most cost-effective life insurance products. It provides life coverage for a specified period during the policy term and if the policyholder dies, the sum assured is paid to the nominee in lump sum or as monthly pay-outs.

Term insurance gives the benefit of maximum coverage at a minimum premium. Compared to an ULIP or endowment policy, term insurance can provide a family more financial protection. However, it does not have the savings or wealth creation advantages like a ULIP or endowment policy.

The premium of term insurance plan is very low. A 30-year person might get Rs 2 crore coverage with only Rs 25,000 yearly premium. But if you are alive during the insured period, you have to forgo all the money you have paid as premium.

Endowment policy

Endowment policy is among the most popular life insurance products in India because it combines the twin benefits of investment and life cover similar to a unit linked insurance plan (ULIP). When you invest in an endowment plan, you are getting life coverage as well as saving money for you or your child’s future. The policyholder’s family or nominee gets the sum assured amount on death of the policyholder.

In case the policyholder survives the policy term, he gets the full maturity amount plus any bonus accrued on the invested money. It is also use for tax deduction under section 80C and 10D of IT Act.

But being a debt instrument, return of endowment policy is less than ULIPs. Like ULIP, an endowment policy offers three advantages, i.e. investment for future, life coverage and tax savings.