So, here, let's see how the benefit of Unit Linked Insurance Plans (ULIPs) can be achieved (and bettered!!) using a combination of Term Insurance and Equity Linked Savings Scheme (ELSS) mutual fund (MF).

Let's recap the benefits of Unit Linked Insurance Plans (ULIPs):

1. Flexibility to choose the type of investment scheme - Mostly equity, mostly debt, and various combinations in-between
2. Transparency - You know where your investments are being made, and you know the charges incurred by you

(For more details, please read "ULIP v/s Endowment Plan for Life Insurance")

Here is what we are going to do: First option is to buy insurance using a ULIP. The second option is to buy insurance using a term plan, and since term insurance is a lot cheaper than ULIPs, invest the difference in the premiums in ELSS.

Let's walk through a real-life example and see how both these options compare.

Here is a comparison of charges for a ULIP and a term plan for a sum assured of Rs. 10 Lakhs for a 30 year old male (Policy term is 25 years):

Thus, for our option B (combination of Term Insurance and ELSS), we would invest the difference - Rs. 77,037 per year - in an ELSS.

ULIPs charge a fee, called "Premium Allocation Charge" every year. Generally, this fee is very high in the initial 2-3 years, and goes down for subsequent years. Apart from this, ULIPs also charge a yearly "Fund Management Fee", just like mutual funds. (The names for these fees may differ a little among fund houses). These fees are charged as a percentage of money invested.

For the ULIP in our example, the Fund Management Fee is 1.5%, and the "Premium Allocation Charge" is as follows:

As you can see, the charge is the maximum in the initial years. This is the biggest disadvantage of ULIPs - since the investment is for a very long term, the higher fee in the initial years has a huge impact on your final returns due to the compounding effect. (We would see it illustrated in our example)

The premium of a ULIP is broken down into two components. The first is the "Mortality Charge", which is the amount for insuring your life. The second is the remaining amount, which is invested in the option you choose.

Let's say that the mortality charge for the ULIP is also Rs. 2,963. Thus, the amount remaining for investment is also Rs. Rs. 77,037 per year.

If we deduct the "Premium Allocation Charge" and the "Fund Management Fee", the amount remaining for investment is:

On an average, ELSS schemes have a fund management fee of 2%. Thus, amount actually invested would be Rs. 75,496 per year in the case of ELSS.

The following table compares the returns generated by our two options, if we assume the rate of return to be 12% per year for both these:

Download the spreadsheet for the calculations

(Continued on the next page....)

Other articles you might be interested in:

• ELSS is not for someone else
• Direct investment in Stocks versus Mutual Funds (MFs)?
• Goal Based Investing
• ULIP v/s Endowment Plan for Life Insurance
• “Term policy” is the best policy