A ULIP with High Coverage or a ULIP Combine with a Term plan?

Every portfolio will naturally have two components, namely insurance coverage and investments. Life insurance coverage is necessary to safeguard your family’s financial future in case something unexpected and sudden happens to you. Term insurance is one of the purest forms of life coverage where the insurer pays out a fixed sum assured to your nominee in the event of your demise within the policy period. At the same time, many people also opt for ULIPs or unit-linked insurance plans, where most of your premium is allocated towards investments in various funds for future wealth creation and you also get a certain sum as life coverage, although it may not always be sufficient to meet future needs of your family.

As can be seen, there is a choice to be made with every investment. Will a ULIP with higher coverage be better for your portfolio? Or should you continue with a regular ULIP and accentuate it with term insurance coverage instead? Here’s looking at both these scenarios in this article.

Choosing a ULIP

Unit-linked insurance plans (ULIPs) are some of the most effective investment options when you are saving for specific financial goals like retirement wealth creation, higher education costs of children, buying a home, and so on. The biggest benefit offered by ULIPs is that they allocate most of your premiums towards investing in equity, debt, or balanced (a mixture of debt and equity) funds, depending on your risk appetite and financial goals. You can rebalance your portfolio periodically and switch funds to maximize your returns and lower risks. Now, ULIPs also come with life coverage which varies as per the insurance company in question. These investments also have minimum lock-in periods of five years, after which you can redeem or continue with them.

Coming specifically to life coverage offered by ULIPs, it is decent enough in most cases. Yet, there is always the question of financially securing your family for the future. You may require a higher sum that is not otherwise possible with your ULIP. In such a scenario, you may think of choosing a ULIP with higher coverage.

However, this may be a costlier proposition and you might not get as much coverage as you may otherwise obtain with term insurance plans. It all depends on the kind of life coverage that you desire, keeping future household costs, inflation, children’s higher education, weddings, and other goals, and your present liabilities in mind. Going by these aspects, it is advisable to opt for life coverage that is at least 15-20 times of your income. So, if you earn Rs. 20 lakh per year, then you may aim for Rs. 3-4 crore of coverage in this case. Higher amounts may not be possible with ULIPs, unless you pay substantially more to enhance your coverage.

Choosing to Combine a ULIP with a Term Plan

The second option, as mentioned, is to combine your ULIP with a term insurance policy in your portfolio. How does this pan out? It can actually give you several advantages. These include the following:

• Firstly, you can beef up your life insurance coverage with a separate term insurance policy that gives you sizable and sufficient coverage for the long haul.
• Secondly, you can obtain this policy at a comparatively reasonable rate, especially if you are on the younger side of the age spectrum.
• Thirdly, you can create a solid financial safety net for your family with the life coverage provided by the ULIP and the term plan coverage together. Your family’s financial goals, repayment of your debts, buying a home, paying for your children’s higher education, and meeting household expenditure will be possible down the line, if necessary and even in your absence, with a suitable coverage amount.

Just to cite an example, let us say you are 30 years of age and want suitable coverage till 60. In this case, suppose you want coverage of Rs. 2 crore for safeguarding your family’s financial future. Your premium will approximately start from only Rs. 16-17,000 annually, which is quite reasonable, to say the least. Conversely, getting up to say 40 times of your annual premium for a ULIP will still not give you sizable coverage.

For example, you have to keep your annual premium below Rs. 2.5 lakh in order to avail of tax exemptions on your ULIP. Hence, if you are investing Rs. 2.45 lakh per year in a ULIP, then you can opt for life coverage of a maximum of Rs. 98 lakh. The premium costs for the same will also be on the higher side.

This is where term insurance becomes a handy option if you combine it with your ULIP. Note that term insurance premiums are tax-deductible under Section 80C up to Rs. 1.5 lakh. The same also holds true for ULIPs and if you have both investments in your portfolio, then your maximum deduction will be Rs. 1.5 lakh. The entire premium payment will not be tax-deductible. However, you can strategically combine both these investments to maximize your deductions likewise, while getting enhanced life coverage simultaneously.

Conclusion

So what should you do in this scenario? If you want to save for retirement, pay for future life goals, and accumulate a corpus, then a ULIP is always a great option. You will also get decent life coverage which functions as another plus point of this investment option. However, if you want to completely secure your family financially with higher life coverage amount, then term insurance is the way to go. Combine these two investments to build a well-rounded portfolio.

FAQs

      1. What are the advantages of combining a ULIP with a term plan?

The biggest advantage of combining a ULIP with a term plan is getting dedicated and high life insurance coverage with the latter, and the moderate life coverage with high opportunities for investment returns with the former. It helps you get the best of both worlds, i.e. investment and insurance.

      2. What are the risks of a ULIP?

The risks of a ULIP include market volatility, high fees, and surrender charges, which can negatively impact the returns on your investment. However, staying invested for longer durations may help you get better returns.

      3. What is the right term insurance coverage to choose?

You can choose up to 15-20 times of your annual salary as your basic term insurance coverage. However, the final amount may be higher, after accounting for future inflation, children’s education and wedding costs, future family household expenses, and other debts/liabilities that you have.

 

Chirag Iyer - BFSI Enthusiast

Chirag is a writer and an avid reader who loves to drink coffee! His other interests include boxing, karate, and singing.