For most Indians, Term Insurance is the clear choice for pure protection—high cover at low cost. Keep investments separate via mutual funds or equity instead. ULIPs mix insurance + investments, carry higher costs and a 5-year lock-in, and maturity tax benefits now depend on premium caps. (IRDAI, Policyholder, India Budget)
Why this comparison matters
Many households still “invest” in insurance. That often leads to inadequate cover and sub-optimal returns. This guide explains how ULIPs and term plans differ, the tax rules (2025), and a clear decision framework for Indian retail and HNI investors.
Quick verdict
- If your goal is family protection: Buy Term Insurance. Invest the savings (vs ULIP premiums) in diversified mutual funds or other instruments.
- If you insist on one product for discipline + goal-linked investing: Consider ULIPs only if you can tolerate the 5-year lock-in, understand charges, and your aggregate annual premium for ULIPs stays within the tax-exempt thresholds. (Policyholder, India Budget)
Rule of thumb: “Protect with term; invest outside insurance.”
What is Term Insurance?
Term insurance is a pure risk cover. If the life assured dies during the policy term, the insurer pays the sum assured. There is no payout on survival (unless you choose costly return-of-premium variants). Premiums are typically the lowest among life products. (IRDAI)
Who it suits: Anyone with dependants or liabilities—salaried professionals, entrepreneurs, and HNIs needing large, affordable cover for estate liquidity.
What is a ULIP?
A Unit Linked Insurance Plan (ULIP) combines life cover with market-linked funds (equity, debt, balanced). Your premium is split: a part covers mortality; the rest is invested in chosen funds. ULIPs have a mandatory 5-year lock-in, and you may switch funds within the policy. (Policyholder)
Who it suits: Investors seeking goal-based investing within insurance, willing to accept product complexity, lock-in, and policy-specific charges.
Side-by-side comparison (2025)
| Feature | Term Insurance | ULIP |
|---|---|---|
| Primary purpose | Pure life cover | Life cover + investments |
| Cost (₹ per ₹1 crore cover) | Lowest (varies by age/health) | Higher due to multiple charges |
| Liquidity | Not applicable | 5-year lock-in; partial withdrawals after lock-in as per policy |
| Returns | Not applicable | Market-linked; reduced by policy charges |
| Transparency | Simple, easy to compare | Complex (mortality, admin, fund management, etc.) |
| Tax – Premiums | Eligible under Sec 80C (subject to conditions) in old regime; not in new regime | Eligible under Sec 80C (subject to conditions) in old regime; not in new regime |
| Tax – Maturity | No maturity benefit (except ROP variants) | Sec 10(10D) exemption not available for ULIPs issued on/after 1 Feb 2021 if aggregate annual premium exceeds ₹2.5 lakh in any year; otherwise normal 10(10D) conditions apply. STT/capital-gains rules may apply to non-exempt ULIPs. |
| Ideal buyer | Anyone needing large cover | Niche: disciplined investors comfortable with lock-in and product rules |
Sources: Sec 10(10D) premium cap & post-2021 tax treatment; ULIP lock-in; term definition; 80C & new regime notes. (India Budget, Policyholder, IRDAI, Liferay DXP, Income Tax India, The Economic Times)
The tax rules you must know (concise)
- Section 80C (old regime): Life insurance premiums qualify only if the annual premium ≤ 10% of Sum Assured for policies issued on/after 1 April 2012. In the new tax regime, 80C is generally not available. (Liferay DXP, Income Tax India)
- Section 10(10D) – ULIP maturity: For ULIPs issued on/after 1 Feb 2021, maturity proceeds are not exempt if the aggregate annual premium of all ULIPs exceeds ₹2.5 lakh in any policy year. Non-exempt ULIP gains are taxed as capital gains (equity-oriented treatment in many cases), and STT applies at redemption. Death benefits remain tax-free. (India Budget, The Economic Times)
Planning tip: If you own multiple ULIPs, track the combined annual premium to avoid unintentionally breaching the ₹2.5 lakh threshold. (India Budget)
Cost & return math (simple, actionable)
A. Cost of cover (term):
Cost per ₹1 lakh cover = Annual premium ÷ (Sum Assured / ₹1,00,000).
Lower is better. Compare across insurers for the same age, term, and riders.
B. ULIP “net return” intuition:
Approximate net return ≈ Gross market return − Total annualised charges. Even modest charges (say 1.5%–2.5%) compound heavily over long horizons. Prefer direct mutual funds (TER ~0.3%–1.0%) for pure investing.
C. Illustrative 20-year comparison (hypothetical):
- Strategy 1 (Buy Term + Invest): Term premium ₹15,000/year for ₹1 crore cover; invest ₹85,000/year in a diversified mutual fund at 11% CAGR → Future Value ≈ ₹64.6 lakh.
- Strategy 2 (ULIP): Pay ₹1,00,000/year into a ULIP. Assume 9% net CAGR after charges → Future Value ≈ ₹56.0 lakh.
The term + invest route wins on flexibility and expected wealth while ensuring full protection throughout.
How to choose: a decision checklist
Pick Term Insurance if you need:
- Maximum cover at minimum cost for family income replacement.
- Simplicity and the ability to invest separately (MFs, NPS, SGBs).
Consider a ULIP only if you:
- Want one policy for protection and investing, accept a 5-year lock-in. (Policyholder)
- Are confident your aggregate ULIP premiums will stay ≤ ₹2.5 lakh annually (for policies issued on/after 1 Feb 2021) to retain 10(10D) benefits. (India Budget)
- Will actively monitor fund choices and charges.
Common pitfalls to avoid
- Mixing goals: Don’t expect ULIPs to replace a full investment plan and give inexpensive cover.
- Ignoring tax regime: If you’ve opted for the new regime, 80C deduction is largely irrelevant—don’t let a tax-saving pitch drive your decision. (Income Tax India)
- Under-insuring: Calculate human life value (income × years to retirement) and add liabilities to size your term cover.
- Not reading charge tables: In ULIPs, check mortality, policy admin, fund management, switching, and discontinuance charges before committing.
FAQs
Q1. Is term insurance maturity tax-free?
Most term plans have no maturity. If you choose “return of premium,” maturity may be taxable per prevailing rules; death benefits remain tax-free under 10(10D). (IRDAI)
Q2. Are ULIP withdrawals after 5 years tax-free?
Only if your policy qualifies under 10(10D) (e.g., aggregate ULIP premiums within the cap for policies issued on/after 1 Feb 2021). Otherwise, gains are taxed as capital gains and STT applies. (India Budget, The Economic Times)
Q3. Can I claim 80C on premiums?
Yes under the old regime (subject to the 10% of Sum Assured rule and overall ₹1.5 lakh limit). In the new regime, 80C is generally not available. (Liferay DXP, Income Tax India)
Bottom line for Indian investors
- Buy a large term plan first to secure your family.
- Invest separately through low-cost, diversified funds aligned to your goals and risk profile.
- Consider ULIPs only when you value the bundled structure, accept the 5-year lock-in, and your ULIP premiums won’t breach the ₹2.5 lakh cap that affects tax-free maturity. (Policyholder, India Budget)