Why Term plan with mutual fund sip is far better than ULIPs
When it comes to financial planning, two critical goals are life insurance and wealth creation. However, many individuals fall into the trap of combining these two objectives through products like Unit Linked Insurance Plans (ULIPs). While ULIPs promise the dual benefit of life insurance and investment, they often fall short on both fronts. A more efficient and transparent approach is to buy a term insurance plan for protection and invest separately through a mutual fund SIP (Systematic Investment Plan) for wealth creation.
Most of the ULIPs (Unit Linked Insurance Plans) offer 10 times insurance cover on the annual premium, which is very less. This means if you pay ₹1 lakh yearly, your life insurance cover is ₹10 lakhs—often insufficient for real protection. As insurance, it’s weak; as investment, returns are market-linked and charges can reduce gains.
Clarity and Focus: Insurance is Not Investment
Many get confused with insurance and investments. The primary purpose of life insurance is to provide financial security to your loved ones in your absence. Investment, on the other hand, is about growing your wealth. When these two are mixed, as in the case of ULIPs, the result is often a product that doesn’t do justice to either goal. Term plans are pure protection products — they offer high life cover at a low premium. Mutual fund SIPs are pure investment products, offering market-linked returns with full transparency and liquidity. This clear distinction helps in better financial planning.
Cost Efficiency: Term Plans Are Cheaper, SIPs Are Transparent
One of the biggest drawbacks of ULIPs is their high cost structure. ULIPs charge various fees, such as premium allocation charges, policy administration charges, fund management charges, and mortality charges. These charges significantly eat into your investment value, especially in the early years.
In contrast, term insurance premiums are low because they do not have an investment component. You can get a substantial life cover (e.g., ₹1 crore) for a very affordable annual premium. Meanwhile, mutual fund SIPs charge a transparent fund management fee (TER – Total Expense Ratio), and there are no hidden costs or deductions from your invested amount.
Better Returns with Mutual Funds
ULIPs invest in a mix of equity and debt funds, but the choice of funds is limited and performance is not always competitive. In contrast, mutual funds offer a wide range of options — large-cap, mid-cap, multi-cap, index funds, thematic funds, and more — with better historical performance and greater transparency. SIPs also allow rupee-cost averaging, helping investors ride out market volatility more effectively.
MUTUAL FUNDS RETURNS ARE SUBJECT TO MARKET CONDITIONS
ULIPs are long-term products with lock-in periods (typically 5 years), and liquidity is restricted. Even after the lock-in, withdrawals can be subject to conditions or surrender charges. With mutual fund SIPs, there’s better flexibility. While equity funds have a 1-year lock-in for tax-saving ELSS funds, most other funds can be exited anytime (with or without a small exit load), offering higher liquidity.
Why ULIPs are useless as insurance products: View
ULIPs Offer Inadequate Insurance Cover
Another major concern with ULIPs is that the life insurance coverage is often inadequate. A ULIP offering ₹10 lakh or ₹20 lakh in cover may not be enough for your family in the event of your untimely demise. With inflation and increasing financial responsibilities, a term cover of at least 10–15 times your annual income is generally recommended.
Term plans can provide this kind of adequate protection at a fraction of the cost. ULIPs, because of the combined structure, often compromise on the insurance amount.
Mortality Charges and Refund Confusion in ULIPs
In ULIPs, a portion of your premium goes toward mortality charges, which cover the insurance component. These charges increase with age and are deducted from your fund value regularly. Some ULIPs claim to refund the mortality charges on maturity, but they are often refunded as money, not units, and only after a long tenure. This means your investment corpus could still fall short of expectations, and you lose out on the compounding potential of those deductions over the years.
Why Term plan with mutual fund sip is far better than ULIPs as it promise a “best of both worlds” solution, but in reality, they are a compromise on both insurance and investment. A smarter, more effective strategy is to buy a term insurance plan for peace of mind and invest separately in mutual fund SIPs for long-term wealth creation. This approach offers better returns, greater flexibility, more transparency, and adequate insurance cover — all essential ingredients for sound financial planning.
The best is to plan for a term plan with mutual funds investments.
