Life Insurance vs. ULIP - Know the Top Differences before Investing Your Money

In India, you can seldom find an individual who has never invested in a life insurance policy. Irrespective of one's income, people invest in such policies to lead a happy life. 

However, while investing in a life insurance policy, people rarely look beyond the Sum Assured (SA), the amount the policyholder's nominee receives in case of a claim. Hence, they may or may not get the same returns as a fixed deposit (FD). Typically, life insurance returns are 1% to 2% lower than the prevailing FD interest rates. 

But, informed investors know that there exists a special life insurance policy that generally provides higher returns than conventional policies - Unit Linked Insurance Policy or ULIP. 

As the name suggests, ULIP is a market-linked insurance policy. In a ULIP, a part of your policy premium goes to the capital or secondary market, while the other goes to the life cover. 

Since both ULIPs and life insurance policies offer the same tax saving, wise investors prefer ULIPs more. However, besides returns, there are a few other factors that differentiate ULIPs from life insurance. The following sections discuss the top differences.

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The Difference in the Types of Policies:

You can buy three types of life insurance policies in India - term, whole life, and endowment.

• A term insurance policy is usually the cheapest life insurance policy you can buy online or offline. It gives money to the policyholder's nominee only if the policyholder expires. If the policyholder stays alive on policy expiration, doesn't receive anything. 
• You can buy a whole life insurance policy if you want an extended life cover. Moreover, the insurer may return you a lump sum amount on maturity.
• An endowment policy will suit you more if you treat life insurance as an investment. But, since a part of your premium goes towards the life cover, the returns from endowment policies are usually lower than ULIPs. 

A ULIP offers you three broad fund options to park your money - equity, debt, and balanced, besides deducting a specific amount for the life cover. 

• If you choose the equity option in a ULIP, the insurer invests your money in high-quality large and mid-cap stocks with solid growth potential.
• Debt funds invest in secondary market instruments like sovereign or corporate bonds, debentures, and other money market instruments.
• Balanced funds divide your money into equity and debt.

Usually, equity funds offer maximum returns. Hence, a ULIP is the best-suited when you want higher returns plus life cover.  
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The Difference in Risk and Returns

Let's start this section with a fact - Unlike ULIPs, conventional life insurance products from reputed insurers provide assured returns. Still, most modern investors prefer investing in ULIPs.

Conventional life insurance policies are not linked to the market, meaning they inform you of the Sum Assured and returns when the policy commences. In contrast, a ULIP policy mentions the Sum Assured, but the returns depend on market conditions.  

Back-of-the-envelope calculations suggest that ULIP policyholders earn more significant returns than conventional life insurance policyholders. Moreover, since you can freely switch between equity, debt, and balanced, informed investors use this feature to maximize their returns. For example, if the market tumbles, you can invest in equity to capture the momentum and earn more when the market resumes its upward journey. And, when the market reaches its peak, you can conveniently switch to debt to protect your capital.

A ULIP is a dynamic investment. If you choose to invest in debt or equity, you may have to monitor your investment often. Conversely, investing in a balanced fund is wise if you do not have the time or know-how to handle the switches.  

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ULIP vs. Life Insurance - Which Is Better?

Both ULIPs and life insurance offer tax savings, safety, and decent returns. But, since the Indian economy and the stock market are growing faster than before, Indian investors are turning more towards ULIPs. Hence, if you want decent returns and sizeable tax savings, look no further than a ULIP. 

Edelweiss Tokio has set a benchmark ULIP industry. Its flagship product, the Edelweiss Tokio Life Wealth Secure Plus, is ranked number one ULIP in India by CRISIL.