ULIP Plan vs Term Insurance Plan: Key Differences Explained

2025-06-02

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When it comes to securing your family’s financial future, life insurance is often the first step. However, even in a market filled with options, many buyers remain confused between two popular plans: Unit Linked Insurance Plans (ULIPs) and Term Insurance Plans.

Both products serve very different purposes and suit different financial goals. While term insurance is ideal for financial protection in your absence, ULIPs combine life cover with investment opportunities. But how do you decide which is the better choice?

In this blog, we’ll help you understand the key differences between ULIP and term insurance plans, what each one offers, and how to pick the right option for your financial goals.

Key Takeaways

ULIPs provide life cover plus market-linked investment, making them ideal for long-term goals like retirement or a child’s education.
Term insurance provides financial protection without any investment component. It's the most cost-effective way to secure your family’s future in your absence.
ULIPs have higher premiums due to investment and associated charges. Term insurance, on the other hand, offers high coverage at a much lower cost.
ULIP returns depend on the market performance of your chosen funds. Term plans offer no returns, but they ensure peace of mind with guaranteed protection.
Both ULIPs and term plans offer deductions under Section 80C and potential tax-free returns under Section 10(10D), subject to conditions set by the Income Tax Act.

What is a ULIP?

A ULIP or Unit Linked Insurance Plan is a mix of both investment and insurance. In ULIPs, one premium segment is paid towards the insurance and is known as a mortality charge. In contrast, the other segment is invested in various investment options like market reserves, securities, debts, values, or hybrids.

But ULIPs aren’t just about flexibility; they also offer dual benefits:

Maturity Benefit
Death Benefit

Let’s break these down:

Maturity Benefit: If you survive the policy term, you receive a maturity amount, which is the fund value on the policy’s end date. This is calculated as:

Fund Value = NAV (Net Asset Value) × Number of units you own
Once the maturity amount is paid out, the policy terminates.

Death Benefit: If the policyholder passes away during the policy term, the nominee receives a death benefit, which could be:
The Sum Assured,
The Fund Value, or
Sum Assured + Fund Value (depending on the plan option chosen).

For Example, Kailash, 30, bought a ULIP in 2023 to save for his son’s higher education.

Annual premium: ₹1,20,000
Charges deducted: ₹4,000
Investable amount: ₹1,16,000
Initial NAV: ₹500
Units purchased: ₹1,16,000 / ₹500 = 232 units

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Scenario 1: Kailash survives the policy term (25 years)

Additional units accrued: 1800
Total units = 232 + 1800 = 2032 units
NAV in 2047 = ₹700
Maturity Benefit = 2032 × ₹700 = ₹14,22,400
Policy ends after payout.

Scenario 2: Kailash passes away mid-term

Total units till date = 232 + 1000 = 1232 units
NAV at death = ₹700
Fund Value = 1232 × ₹700 = ₹8,62,400
Sum Assured = 10 × ₹1,20,000 = ₹12,00,000
Death Benefit = Higher of fund value or sum assured = ₹12,00,000 to the nominee (his wife)

This example highlights how a ULIP serves both as an investment tool and a financial safety net. It’s ideal for those with long-term goals like retirement planning, child education, or wealth creation, while ensuring life cover for your family.

Key Features of ULIPs

ULIPs offer numerous features that make them the best. Listed below are some of them to explore:

Flexible Fund Allocation: You can choose the type of funds based on your risk appetite and switch between them when needed. In layman's terms, it implies that you can pick the funds you need to invest in and can switch between any of the alternatives.
Market-Linked Returns: The investment component gives you exposure to financial markets, with the potential for long-term wealth creation.
Life Cover: In case of the policyholder’s demise, a death benefit is paid to the nominee.
Tax Benefits: Premiums paid qualify for deductions under Section 80C, and the maturity amount may be tax-exempt under Section 10(10D).
Lock-in Period: ULIPs come with a mandatory lock-in of 5 years, which also promotes long-term financial discipline.

What is a Term Insurance Plan?

A term insurance plan is the purest form of life insurance policy that offers financial protection to your family in your absence. If the policyholder passes away when the term plan is in force, the death benefit is paid out to the beneficiaries. A term life insurance plan is affordable and has lower premiums as compared to other types of life insurance plans.

There are various types of term insurance plans, and you can choose one as per your financial goals and requirements.

Key Features of Term Insurance

Term insurance plans are straightforward, affordable, and focused solely on life cover without the complexities of investments. Here are some of its standout features:

High Coverage at Low Premiums: Term plans offer substantial life cover at much lower premiums compared to other life insurance plans.
No Investment Component: The plan does not offer any returns or maturity value if the policyholder survives the term.
Customisable Benefits: You can enhance the coverage with riders like accidental death benefit, critical illness cover, and waiver of premium.
Flexible Pay-Out Options: Nominees can receive the sum assured as a lump sum, monthly income, or a combination of both.

How is ULIP Different from a Term Insurance Plan?

Choosing between a ULIP and a term insurance plan requires understanding how each works and what they offer. Here's a quick breakdown of the key differences to help you make an informed decision:

Features	Ulip	Term Insurance
Purpose	Insurance + Investment	Pure life insurance
Returns	Market-linked	No returns
Premiums	Higher	Lower
Risk Factor	Subject to market risk	No investment risk
Maturity Benefit	Yes	No (Unless ROP opted)
Tax Benefits	Section 80C and 10(10D)	Section 80C and 10(10D)
Lock-in Period	5 years	No lock-in
Riders available	Limited	Extensive

When Should You Choose a ULIP?

ULIPs are ideal for individuals who want to:

Build long-term wealth while securing life cover
Achieve life goals like buying a house, funding education, or saving for retirement
Benefit from tax-efficient investing under one umbrella
Have the flexibility to switch funds based on market trends and risk profile

ULIPs encourage disciplined investing over the long term and are especially useful if you’re looking to grow your money while staying protected.

When is Term Insurance the Right Choice?

Term insurance is perfect for:

Young professionals with dependent family members
Individuals seeking high life cover at a low cost
Families where the loss of income could lead to financial hardship
People with limited budgets but high coverage needs

If your primary goal is to protect your family financially in case of your untimely demise, then term insurance is the most efficient and cost-effective tool.

Tips for Choosing Between ULIP and Term Insurance

Choosing between a ULIP and a term insurance plan depends on your financial objectives, risk profile, and long-term priorities.

Start by evaluating your primary goal: do you want to grow your wealth while staying insured, or are you purely looking for life coverage? If financial protection is your only concern, a term insurance plan is ideal, as it offers high coverage at low premiums.
Next, assess your risk appetite. ULIPs invest a part of your premium in market-linked instruments like equities or debt funds, which means they carry investment risk. If you're comfortable with market fluctuations and have a long-term investment horizon, a ULIP can help you grow your wealth while staying insured. In contrast, term plans involve no investment component and are completely risk-free.
Also, compare the cost structure of both options. Term plans have lower premiums, while ULIPs may include charges like fund management fees, mortality charges, and policy administration costs.
Consider flexibility as well. ULIPs permit fund switching and partial withdrawals after a 5-year lock-in period, providing greater control over your investment.
Finally, understand the tax implications. Both plans offer deductions under Section 80C and tax-free benefits under Section 10(10D), subject to current income tax rules.

Conclusion

Whether you choose a ULIP or a term insurance plan, selecting a reliable insurer is critical to your financial planning journey. Canara HSBC Life Insurance offers a range of innovative and customer-centric plans like the iSelect Smart360 Term Plan and various ULIPs that cater to diverse financial goals. With flexible features, transparency in charges, and trusted claim settlement, Canara HSBC ensures peace of mind for you and your loved ones.

Our commitment to financial protection and wealth creation makes us a trustworthy partner for both risk coverage and investment needs.

Disclaimer - This article is issued in the general public interest and meant for general information purposes only. The views expressed in this blog are solely those of the writer and do not necessarily reflect the official policy or position of Canara HSBC Life Insurance Company Limited or any affiliated entity. We make no representations or warranties of any kind, express or implied, about the completeness, accuracy, reliability, suitability, or availability with respect to the blog or the information, products, services, or related graphics contained in the blog for any purpose. Any reliance you place on such information is therefore strictly at your own risk. You should consult with a qualified professional regarding your specific circumstances before taking any action based on the content provided herein.

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