This article compares Unit Linked Insurance Plan (ULIP) with a combination of term insurance & Equity Linked Savings Scheme (ELSS) investment, and judges the utility of each strategy. (ULIP versus Mutual Funds - MF)

In "ULIP v/s Endowment Plan for Life Insurance", we saw that Unit Linked Insurance Plans (ULIPs) are better than traditional endowment plans. But then, in ""Term policy" is the best policy", we discussed that investments should be separated from insurance, and therefore, we concluded that term plans are the best form of insurance.

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):

Insurance Company	SBI Life	SBI Life
Scheme Name	SBI Horizon II (ULIP)	SBI Shield (Term Plan)
Premium (Per Year)	Rs. 80,000	Rs. 2,963

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:

Year 1	15%
Years 2 and 3	10%
Year 4 onwards	5%

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:

Year 1	Rs. 64,499
Years 2 and 3	Rs. 68,293
Year 4 onwards	Rs. 72,087

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

	ULIP		ELSS
	Amount Invested	Cumulative value of investments	Amount Invested	Cumulative value of investments
Year 1	64499	72239	75496	84556
Year 2	68293	157396	75496	179258
Year 3	68293	252772	75496	285325
Year 4	72087	363843	75496	404120
Year 5	72087	488242	75496	537170
Year 6	72087	627569	75496	686186
Year 7	72087	783615	75496	853085
Year 8	72087	958387	75496	1040011
Year 9	72087	1154131	75496	1249368
Year 10	72087	1373364	75496	1483848
Year 11	72087	1618906	75496	1746465
Year 12	72087	1893913	75496	2040597
Year 13	72087	2201920	75496	2370024
Year 14	72087	2546888	75496	2738983
Year 15	72087	2933253	75496	3152217
Year 16	72087	3365981	75496	3615038
Year 17	72087	3850636	75496	4133399
Year 18	72087	4393451	75496	4713962
Year 19	72087	5001402	75496	5364194
Year 20	72087	5682309	75496	6092453
Year 21	72087	6444924	75496	6908103
Year 22	72087	7299052	75496	7821631
Year 23	72087	8255676	75496	8844783
Year 24	72087	9327095	75496	9990712
Year 25	72087	10527085	75496	11274154

(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

Related links from the web (Sponsored):

Articles by Category:

• Gold
• Income Tax - IT
• Insurance
• Investment Philosophy and Planning
• Loans
• Mutual Funds
• News / Developments
• Others / Miscellaneous
• Real Estate
• Stocks / Shares / Equities

Note: Please treat the opinion expressed here as a broad suggestion. Please consult your financial planner / investment advisor before making any investment decision.