A common question asked by a common man with uncommon disposable income.We try to uncover it through a brief article.
Term Plan: A Term Life or a Pure Life Insurance is a low cost death cover for a fixed amount for a fixed duration of time. On survival and completion of the duration there is no maturity value payable.
ELSS [Equity Linked Savings Scheme]: ELSS is a 3 year lock-in mutual fund, which as per the Income Tax Act provides a tax deduction under section 80C.
ULIP [Unit Linked Insurance Plan]: Ulips are life insurance policies where the insurance cover is bundled with investment. Unlike traditional insurance-cum-investment policies such as endowment and money-back policies which offer very low returns, Ulips offer market-linked returns.There are 2 types of ULIP plans. Type 1 is a ULIP where Sum Assured or Fund Value whichever is higher is paid. In case of Type 2 of a ULIP, both Sum Assured and Fund Value are paid. However, to derive the full benefit of such plans, an investor needs to compare important points like structure, costs and benefits. Below is a brief comparison for the same.
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A Comparison of Term Plan + ELSS and ULIP Type 2 will give the best:
|
|
ULIP Type 2 |
ELSS + Term |
| Good for |
More than 10 Years Investments |
Less than 10 years investments. |
| On Maturity |
Fund Value |
Fund Value will be paid by ELSS and No Survival Benefit on Term |
| On Death |
Fund Value + Death Benefit will be paid |
Fund Value and Term Life Sum assured will be paid |
| Long Term Costs |
Good for long term investing as there are high upfront charges. In the Long term total charges are lower than Mutual Funds |
Mutual Funds charge close to 2.25% of Annual Fund Management charge till you remain invested. |
| Switching CostsDuring a long tenure of investment, switching funds is very important. |
Mostly ULIPs have 3 Switches Free |
Switches are charged at 3-4%. |
| Switching Tax Costs |
No Tax Implication |
Profits on switching are charged at 10% |
| Discipline |
Compulsion of Investment every year. Helps you plan you child’s future or retirement. |
No Compulsion. Planning to be implemented by you. |
| Tax |
All profits are tax free |
Tax payable on short term gains |
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Conclusion:
ULIP Type II:
Most insurance agents peddle Ulips by telling the investor that he is free to exit from the plan after three years. But it is only after three years that the real benefit of a Ulip kicks in. These long-term investment products have high initial charges so an early exit isn’t usually a sensible decision.With Free Switching option and Tax free returns it is a good investment for the Long Term.
Mutual Funds:
Yes, these are good for the short term, say less than 10 years. In case you have some money which you want to just park for sometime and make an income out of it, the best choice would be Mutual Funds.
Term Insurance:
Moreover a Term Insurance, though a cost effective solution does not keep pace with inflation.Suppose you buy a term insurance cover of Rs 1 crore today. If you were to not live 15 years later, the actual value of the money your family would get would be just Rs 48 Lakh, after factoring in inflation at the rate of 5% a year. A Term Insurance, given its limitations is therefore only best to cover a fixed liability like Home Loan/Mortgage etc.
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Related Article
- How to choose a ULIP?
- Type of Charges
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