In this day and age, where we have many financial products to help us create wealth, sustain our lifestyle, plan for the financial well-being of our loved ones after our death, it can be a tad confusing to choose the most appropriate financial product.
Here, we will explore three most popular investment options- Unit Linked Insurance Plan (ULIP), life insurance term plan, and mutual funds.
First, let’s take a quick look at what these three financial products mean-
- Term plan
A term plan is a life insurance policy that offers the benefit amount to the nominee if the insured individual’s death occurs during the term of the policy. Here, the insured individual pays a premium every year till the end of the policy term. An example of such a product is the HDFC term plan.
- Mutual funds
A mutual fund is a financial product managed by an asset management company. Here, multiple investors pool in their money which is then invested in various financial securities such as stocks, bonds, etc.
A ULIP is an amalgamation of investment and life insurance. When the investor opts for a ULIP, part of their premium goes towards the life insurance, and the other goes towards investing in equity or debt instruments.
Now that you know the essence of the three financial products, let’s take a look at how they compare on various fronts:
The objective of a mutual fund is mainly wealth creation through long-term investments.
A term plan is purely to protect the insured person’s family financially after their death.
In a ULIP, the objective is primarily to provide insurance to the person, along with the possibility of wealth creation.
2. Returns on investment
Mutual funds offer the most potential for returns on investment as they are linked to the market.
Term plans offer no particular returns. The only money received by the nominee from a term plan is in case of the insured individual’s death within the term period.
A ULIP can offer similar returns as mutual funds, depending on the schemes or instruments being invested in.
3. Risks involved
Mutual funds can be low to high risk. There is the potential for extremely high returns, but that is most often linked to high-risk investments.
In case of term plans, there is no market-linked risk. As long as your policy is active and premiums are paid on time, there will be a payout in case of the insured individual’s death within the policy tenure. Hence, the risk to your financial input is negligible.
When it comes to a ULIP, the part of the premiums which go toward your life insurance cover remains unaffected by the market trends. However, the payment that goes for your investments, will be contingent on the market performance and the kind of instruments you have invested in.
4. Lock-in period
Most mutual funds are open-ended, which means you can invest and redeem your units whenever you want.
ULIPs have a lock-in period of 5 years which means that you cannot redeem any part of your investments before the end of the lock-in period without paying a fee or forgoing a part of the returns.
You can withdraw your term plan within the cooling period- a period of time after you have paid for the policy where you can cancel without incurring any charges. After that, your term plan is active as long as the timely premiums continue. You can withdraw the insurance policy before the end of the term, but there will be certain terms and conditions attached to that, which you may need to check with your insurance provider.
It is best to understand your objectives and risk appetite before you decide on a financial product. If you are confused, then don’t hesitate to reach out to a financial planner of your choice.