A term plan and a ULIP both pay a sum assured if the policyholder dies. The similarity ends there. A term plan is pure protection with a low premium and no maturity value. A ULIP combines protection with a market-linked investment fund and charges for both.
The sales pitch for a ULIP often emphasises 'insurance plus wealth creation'. The arithmetic often favours a term plan plus a separate mutual fund. This guide explains the costs, tax rules and situations where a ULIP can still make sense.
What each product does
Term insurance vs ULIP
| Feature | Term insurance | ULIP |
|---|---|---|
| Primary purpose | Death protection | Death protection plus investment |
| Premium | Low for a large cover | Higher; part goes to insurance, part to investment |
| Maturity value | None (pure term) | Fund value, subject to charges and market returns |
| Lock-in | None | 5 years |
| Charges | Mortality charge only | Premium allocation, fund management, administration, mortality |
| Flexibility | Choose cover and term | Choose fund mix; switching may be allowed |
| Liquidity | No investment to withdraw | Partial withdrawal after lock-in, subject to rules |
A term plan is not an investment. If you survive the policy term, you get nothing back. That is the point: you are buying protection, not a savings product. The low premium lets you buy a cover large enough to replace years of income.
How ULIP charges work
A ULIP premium is split between insurance charges and an investment fund. Charges can include premium allocation charges in the early years, policy administration charges, fund management charges, mortality charges and surrender charges. Some charges have been capped by IRDAI, but they still reduce the investable amount.
The mortality charge rises as you age because the insurer's risk increases. The fund management charge is usually a percentage of the fund value. The net return is the fund return minus these charges.
Ask for the net return illustration
Do not compare a ULIP's gross fund return with a mutual fund's return. Ask for the illustration net of all charges, and compare it with a term plan plus a low-cost fund over the same period.
A cost comparison
Suppose a 30-year-old needs ₹1 crore of cover for 30 years. A term plan might cost roughly ₹10,000–₹15,000 a year, depending on health, smoking status and the insurer. A ULIP with the same cover and a similar annual premium allocates part of the premium to charges and the rest to a fund.
Illustrative split of a ₹1 lakh annual premium
| Item | Term plan + mutual fund | ULIP |
|---|---|---|
| Protection cost | About ₹12,000 for ₹1 crore cover | Mortality and rider charges inside the ULIP |
| Investment amount | About ₹88,000 into a mutual fund | Premium minus allocation, admin and mortality charges |
| Fund choice | Any eligible mutual fund | Insurer's fund options |
| Lock-in | None | 5 years |
| Liquidity | Redeem when needed | Partial withdrawal after lock-in |
The exact numbers vary widely. The structural point is that a term plan lets you buy protection at a low cost and invest the difference separately, usually with more transparency and flexibility.
Tax treatment
Premiums for both term insurance and ULIPs may qualify under Section 80C in the old tax regime, subject to the ₹1.5 lakh limit. The maturity treatment is more complicated.