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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):
(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:
Login Required 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 |
What do we see? At the end of 25 years, ULIP returns Rs. 1,05,27,085, whereas ELSS returns Rs. 1,12,74,154. There is a net gain of Rs. 7.47 Lakhs!! This, when the insurance cover for both the schemes is the same!
But that’s not all – it can get even better. With ULIPs, your investment options are limited to the 4-5 schemes offered by your insurance company. Whereas in ELSS, you have a wide choice among fund houses, and you can switch between them if you feel your investment is not giving adequate returns.
Thus, although we have assumed the return to be the same of ULIP and ELSS, the return for ELSS can definitely be better. Even if it is 13%, the returns would be as follows:
Login Required 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 | 85311 |
| Year 2 | 68293 | 157396 | 75496 | 181712 |
| Year 3 | 68293 | 252772 | 75496 | 290645 |
| Year 4 | 72087 | 363843 | 75496 | 413740 |
| Year 5 | 72087 | 488242 | 75496 | 552837 |
| Year 6 | 72087 | 627569 | 75496 | 710016 |
| Year 7 | 72087 | 783615 | 75496 | 887629 |
| Year 8 | 72087 | 958387 | 75496 | 1088332 |
| Year 9 | 72087 | 1154131 | 75496 | 1315126 |
| Year 10 | 72087 | 1373364 | 75496 | 1571403 |
| Year 11 | 72087 | 1618906 | 75496 | 1860996 |
| Year 12 | 72087 | 1893913 | 75496 | 2188237 |
| Year 13 | 72087 | 2201920 | 75496 | 2558018 |
| Year 14 | 72087 | 2546888 | 75496 | 2975871 |
| Year 15 | 72087 | 2933253 | 75496 | 3448045 |
| Year 16 | 72087 | 3365981 | 75496 | 3981602 |
| Year 17 | 72087 | 3850636 | 75496 | 4584521 |
| Year 18 | 72087 | 4393451 | 75496 | 5265819 |
| Year 19 | 72087 | 5001402 | 75496 | 6035687 |
| Year 20 | 72087 | 5682309 | 75496 | 6905637 |
| Year 21 | 72087 | 6444924 | 75496 | 7888680 |
| Year 22 | 72087 | 7299052 | 75496 | 8999519 |
| Year 23 | 72087 | 8255676 | 75496 | 10254768 |
| Year 24 | 72087 | 9327095 | 75496 | 11673198 |
| Year 25 | 72087 | 10527085 | 75496 | 13276025 |
We see that the return generated by ELSS is Rs. 1,32,76,025 – this is around Rs. 27.5 Lakhs more than the Unit Linked Insurance Plan (ULIP)! The best part about this is that this is a very likely scenario, as you would have the most flexibility to invest your funds while using Equity Linked Savings Scheme (ELSS).
The full amount invested in a Unit Linked Insurance Plan (ULIP) is eligible for Section 80C benefit. The full amount invested in an Equity Linked Savings Scheme (ELSS) and the amount spent to buy Term Insurance is also eligible for Section 80C benefit. Thus, both the options – Unit Linked Insurance Plans (ULIPs) and a combination of Term Insurance and Equity Linked Savings Scheme (ELSS) mutual fund (MF) – have the same tax implication, and there would be no impact on the returns even if we consider income tax.
The combination of Term Insurance and Equity Linked Savings Scheme (ELSS) mutual fund (MF) wins hands down as compared to Unit Linked Insurance Plan (ULIP). Following are the benefits:
As always, there remains one universal condition for getting these superior returns – you need to be disciplined in your investments. You should invest regularly in the ELSS, and you should not withdraw any amount form your corpus before time.
Happy investing!
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Hello,
An excellent article. Can we get this in excel so we can tweak the %’s to more realistic figures. Excel would also enable comparison over a 10yr term which to my mind would be a more practical figure as I personally do not expect majority of ULIP customers to carry ULIPs for more than 10 years. I appreciate that in India ULIP’s have been around for only 4-5 yrs or so but my assumption is based on the fact that most indians do not prefer a long term financial commitment , be it credit or debit. Also putting large amts repetedly in a single cos over larger amts of time would create a heavy tilt & dependence in portfolio towards that cos which most people would not like in the long run.
Also sir if possible can we get a similar comparison betn –
1)Bank FD’s & MF nvestments.(Over say 10years)
2) Lump sum Inv In Nifty Index Vs Lump sum Inv in any of the consistent & top performing MF’s. (Over Say 10 years).
I know this is asking for a lot but sir i feel these above examples are important to highlight the points u make in various articles on your website.
Thanks & regards,
Dhananjay
Thanks Dhananjay! Very nice suggestions.
I have added the spreadsheet. Hope that helps
ULIPs are primarily meant for life insurance, and therefore, should be looked at from a long term point of view. Therefore, I have taken an example of 25 years. The problem is, most people see ULIPs as investments!
I have added your request for articles in my list – you should see related articles on the website soon! Do keep visiting…
Your article was very good and covered all the points. However your response to the comment posted by one of the readers, left me a little confused. You say that most people tend to think of ULIP’s as investments-you also mention that if you need insurance, then the term plan is the best. So my question is do ULIPS’s serve any purpose at all.
I would really appreciate your response as I am currently sitting on 3ULIPS with considerable premium commitments and I am considering surrenderring the policies as it appears that ULIPS have no realy purpose.
Hi Suresh,
Thanks a lot!
ULIPs definitely serve a purpose. Let me explain.
If you need insurance, you can buy term insurance for a pure-rick cover.
If you want to invest, you can buy a product like a mutual fund for pure investment.
ULIPs combine insurance and investment. (A small part of your premium is used to provide you insurance, and a large part is invested on your behalf).
Thus, instead of taking care of two things (insurance and MF), you have to take care of only one.
For this convenience, ULIPs charge more than other products – and that is the price you have to pay for the convenience.
In my opinion, ULIPs are good for people who are not very desciplined.
If you can:
- Manage insurance payments regularly
- Manage to invest in MFs regularly (say through a systematic investment plan – SIP)
- Keep renewing your insurance as and when needed,
a ULIP is not for you. You can invest in term insurance + MFs to get the same benefits at a lower cost.
However, if you can not be desciplined in your investments (many people can not be!), ULIPs do provide a shortcut.
Hope this helps you in taking the decision. Please do find out how much money you would get back if you surrender the ULIP plans.
Hello,
An excellent article. While comparing ULIP with (ELSS+Term Plan) we have not considered Entry Load. How will this effect the overall return.
An excellent article. Can we get this in excel so we can tweak the %’s to more realistic figures. Excel would also enable comparison over a 10yr term which to my mind would be a more practical figure as I personally do not expect majority of ULIP customers to carry ULIPs for more than 10 years. I appreciate that in India ULIP’s have been around for only 4-5 yrs or so but my assumption is based on the fact that most indians do not prefer a long term financial commitment , be it credit or debit. Also putting large amts repetedly in a single cos over larger amts of time would create a heavy tilt & dependence in portfolio towards that cos which most people would not like in the long run.
Also sir if possible can we get a similar comparison betn –
1)Bank FD’s & MF nvestments. (Over say 10years)
2) Lump sum Inv In Nifty Index Vs Lump sum Inv in any of the consistent & top performing MF’s. (Over Say 10 years).
Hi Amit,
Thanks a lot!
I agree that the returns for ELSS would go down slightly due to the entry load.
You can find out the impact by introducing the entry load in the downloadable spreadsheet.
your article comparing ulip with elss and term plan was excellent for a layman to understand the difference. i have an lic money plus(180) ulip which is currently doing worse. i have already paid premium for 3 years. should at this point withdraw the policy and switch over above mentioned plan.at this point i will be able to get 2/3 of my investment.
the ulip policy was taken keeping in mind long term investment and insurance, although the charges was not known.
Hi Arun,
I understand your situation. However, if you have already held the ULIP for 3 years, I would recommend continuing it till maturity.
This is because the charges are the highest in the initial 3 years – and you have already incurred them.
Also, since the markets are low right now, you can accumulate stocks through your ULIP at a very low cost.
But please ensure that you are adequately insured – if not, buy a term policy. Please read “Term policy is the best policy” for more.
Hi Naresh,
Thanks!
There is a spreadsheet that you can download – the link is there in the article (you would need to be registered and logged in to download it).
You have suggested some great topics – I would write about them soon.
Dear Sir, An excellent article and one very close to my heart. I am also a Certified Financial Planner (CFP) (www.ezywealthzone.com) and feel Term Plan+MF combo works much better any day. A few things I would like to point out which you seem to have missed:-
1. Mortality charges for full 25 years in case of Term Plan remain constant but in case of ULIP, they go on increasing evry year with age. Hence, the returns from ULIP will be still lesser as at higher age, mortality charges increase to much higher levels.
2. Let us assume a scenario where the Life Assured (LA) dies after 18 years. In case of ULIP, the family of LA gets EITHER the sum assured or the fund value whichever is higher(Rs.43.93 Lakh as per your illustration) BUT NOT BOTH. (There are Class I ULIPs too which give both but their premium is much higher, so it comes to same thing). But in case of Term+MF combo, the family gets SA (10 Lakh) PLUS Rs.47.13 Lakh = Rs.57.13 Lakh. The difference is huge especially for a fmaily which has lost its major bread earner.
Hope this gives a better sense to prospective clients
Sanjeev Bhatia CFP
Hi Sanjeev,
Thanks a lot for adding the very useful points.
And good to see that you share my thoughts! I firmly believe that a person can get much better returns from Term insurance + MF combo, provided he / she is disciplined and has a good financial planner.
For others, ULIPs might be a good choice – they charge a very high fee, but at lease you end up investing for the long term!
BTW, I tried visiting your website, but the links aren’t working. Would try it again after a few days. Do keep in touch.
Liked your article about comparision betweenulip v/s combination of term insurance and mf ELSS.
Tell me specific answer,
I have already paid 2 yr premium of life stage pension plan of ICICI .
Just invested for smart kid plan of ICICI.
Both are ULIP , but have specific feature to protect and plan your life when you are not there.
I have kept minimum insurance to these ulips and planning to buy term insurance of ICICI.
Would it be advisable to Quit from both the ULIP and be invested to mutual fund for longer term.
I have only one argument in favour of my ulips is, I have planned my investment goals keeping special benifits offered by the features of ulips . Is it a wrong descision?
Really superb article..
Thanks and congrats both..
Hey.. Calculations are really practical.
I think at the very end when we compare the differences in final values of both options,we must consider the sum insured that we recieve in ULIP plans but not with other option..
I know it won’t make much difference..
And i really agree your concept,2nd option is far better than investing in ULIP’s..
God bless you.. Keep on writing..
Really superb article..
Thanks and congrats both..
Hey.. Calculations are really practical.
I think at the very end when we compare the differences in final values of both options,we must consider the sum insured that we recieve in ULIP plans but not with other option..
I know it won’t make much difference..
And i really agree your concept,2nd option is far better than investing in ULIP’s..
God bless you.. Keep on writing..
Dear Raag – really nice and intelligent article.
Any thoughts on effect of tax article 10(10D) on returns of ULIP vs MF? As ULIP is an insurance investment, final money received is tax free as per 10(10D) while returns from MF are subject to tax as per income level. Kindly provide your thoughts.
The long term capital gain from equity MFs is completely tax free,. so they are at par for investment > 1 year.
Great, thanks for the clarification.
Dear sir,
can you elaborate ICICI pru pinnacle super scheme? whether to invest in it or not.
