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Why ULIPs are Superior to the Combo of Term Insurance + Mutual Funds

After having done a fair bit of research into financial and investment tools, tech-savvy Indians tend to come to this conclusion: All I need is a combination of term insurance and mutual funds. My life is set!

Well, they’re not incorrect in their research. The issue is that both mutual funds and term insurance are marketed well in India today by all types of media, face-to-face by customers, and by financial experts too. Naturally, research on the Internet will only reveal what most people are talking about. The same goes for any numbers you research into or real-world data of performance.

A far superior product exists in the market that not only gives you the same benefits as mutual funds as far as long-term corpus creation goes, but also covers your family financially in case you meet an untimely end. Instead of going for term insurance and mutual fund schemes separately, investing in a Unit-linked Insurance Plan (ULIP) proves more lucrative and convenient. Let’s explore how:

Goal Orientation

Financial instruments from which withdrawals are easy or do not attract penalties tend to be broken before the intended term. Moreover, one invests in a mutual fund for general-purpose savings and not to meet established financial goals.
ULIPs, however, are always goal oriented; for example, you start a ULIP for your child’s education or marriage. Stopping a ULIP attracts heavy penalties and there is even the first 5 years' lock-in period. This type of “forced investing” ensures you do not take your eyes away from the greater good and keeps you on track.

Reduced Hassle

Why go for two separate schemes when you get dual advantages of two different products in a single investment plan? ULIP not only provides you higher returns in the long run, but covers you against the risk of death and disability as well. Subscribing to a plan that takes care of both maximizing your profits and providing you financial security in an unfortunate event is like killing two birds with one stone.

ULIP Takes Less and Gives More

Fund Management Charges (FMC) in the case of mutual funds can go as high as 2.5% of total assets; whereas the maximum ceiling in the case of ULIPs is 1.35%. Let’s understand this better with an illustration.

Say you invested in mutual funds for a period of 30 years and your corpus stands at INR 2 crores. On this amount, you will be liable to pay about 5 lakhs as FMC and that is not a small amount. Contrarily, in the case of ULIPs, the same gets reduced to close to half.

The Advantage of Tax Exemption

By investing in ULIPs, you can reduce your tax burden up to a maximum amount of INR 1,50,000 in accordance with Section 80C of the Indian Income Tax Act. Besides, gains from ULIPs do not attract tax, which is not the case with mutual funds after the Budget of FY2018-19. Not to forget that mutual funds will also attract capital gains tax when you move your funds between debt and equity instruments. With ULIPs, this tax does not apply.

We hope these are reasons enough to give you a clear understanding as to why ULIPs are superior to the combo of term insurance and mutual funds.

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