Ritesh Sabharwal CFP®

W.M.W #17: ULIPs vs (Term + MF): Which is better?

Reading time: 5 minutes - October 11, 2025

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Hey Reader

This is one of the most common questions I get:
​“Should I buy a ULIP since I get both Insurance + Investment in 1 product itself?”

On paper, ULIPs sound neat. It gives you life cover and also helps to “grow” your money. For someone who doesn’t want to manage too many things, it feels like a clean solution.

But when you dig deeper, the math almost always tilts in favor of Term Insurance + Mutual Fund combo. And here’s why you should care - the wrong choice here can cost you crores of rupees.

#1 - ULIP: The Insurance + Investment Combo

ULIPs are marketed as a “two-in-one” solution. You pay a big premium, and part of it goes towards life insurance while the rest is invested in funds (equity, debt, or hybrid).

Let's take an example.​
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• Sum Assured: ₹25,00,000
• Policy Investment Period: 10 years
• Policy Withdrawal Period: 30 years
• Annual Premium: ₹2,50,000 yearly
• Assumed Return: 8%

👉 At maturity, ULIP fund value = ₹1.06 Cr along with ₹25 lakhs premium amount paid

Sounds decent, right? But here’s the catch:

• You had to shell out ₹25 lakhs in premiums over 10 years.
• Your actual IRR is only 8.7% on a yearly basis (Multiple charges also apply - fund management, policy administration, premium allocation).
• If you pass away, the nominee only gets 25L or 10x your premium.
• ULIPs have a 5-year lock-in before you can even touch your money.

So while the convenience looks attractive, you’re paying a very high “price of simplicity.”

Now let's see the impact of Term Insurance + Mutual Fund combo for the same ₹25 lakhs premium paid over the 10 years investment period.

#2 - Mutual Fund + Term Insurance = The Winning Combo

Term insurance strips away the “investment” and focuses purely on protection. It’s simple, affordable, and gives your family peace of mind.

Example:

• Sum Assured: ₹25,00,000
• Policy Period: 30 years
• Annual Premium: Just ₹7,000 annually (ranges ₹6-7k depending on term plan provider)
• Total Premium paid over 30 years = ₹2.1 lakhs

That’s it. For less than 1/10th the cost of ULIP, you can secure your family’s future for the same ₹25 lakhs cover.

And here’s the big kicker - you now have a huge surplus left (the difference between ULIP and term premium) that you can invest elsewhere.

Take the difference in premium:

• ULIP annual premium = ₹2,50,000
• Term annual premium = ₹7,000
• Surplus = ₹2,43,000 every year for 10 years

Now invest this in an equity mutual fund SIP @10% (conservative) for 30 years

• Future Value = ₹2.86 Cr
• Capital Gains = ₹2.62 Cr (₹2.86 Cr - ₹24.3 lakhs)
• Even after LTCG tax ( 12.5% * 2.62 cr = ₹31.5 lakhs), you still take home = ₹2.55 Cr

Compare this to ULIP value of ₹1.31 Cr.​
👉 That’s a difference of ₹1.24 Cr more in your pocket with the Term Insurance + MF strategy.

Why Do People Still Buy ULIPs?

• Convenience illusion: One policy that does “everything.”
• Family friend influence: Some uncle/aunt or agent just sold you the policy
• Aggressive marketing: ULIPs have higher commissions, so banks/agents push them hard.
• Fear of investing: Many people don’t trust themselves with SIPs, so they choose bundled products.
• Tax benefits: Tax savings under Sec80 and Sec10(10D).

But when you see the actual math, it’s clear ULIPs are rarely the smarter choice especially with the changes in ULIP taxation.

ULIPs used to enjoy generous tax benefits, but the rules changed in 2021. Here’s what you must know:

Taxation on Premiums Paid (Section 80C)

• ULIP premiums qualify for deduction under Section 80C (up to ₹1.5 lakh per year).
• For policies bought after April 1, 2021, deduction is allowed only if premium ≤10% of sum assured.
• For older policies (before April 1, 2021), the limit was 20% of sum assured.

Taxation on Maturity (Section 10(10D))

• Policies issued on/before Feb 1, 2021: Maturity benefits are tax-free (subject to conditions).
• Policies issued after Feb 1, 2021:
  • If annual premium ≤₹2.5 lakh → maturity proceeds are tax-free.
  • If annual premium >₹2.5 lakh (in any year) → maturity proceeds are taxable.

The one exception: The amount received on death of the life assured is always tax-free under Section 10(10D).

Why does this matter?

ULIPs do offer some benefits - they give you insurance + investment in one place, you can track them online, enjoy Section 80C tax benefits, and even switch between equity/debt funds. They’re for people who want a hassle-free, “all-in-one” option.

But here’s the truth: returns are moderate.

On the other hand, Term Insurance + Mutual Funds require a bit more management but deliver:

• Superior returns
• Flexibility and liquidity
• Life protection with wealth creation

Think of it like this:

• ULIP = Insurance + investment, moderate returns, higher costs - a readymade thali. Convenient, but you can’t pick and choose much.
• Term + MF = Superior returns, flexible, liquid, better for long-term wealth creation - cooking your own meal. Needs some effort, but healthier, tastier, and gives you control.
• Decision factor: Your financial goals, risk appetite, and whether you want a readymade solution or are okay “cooking your own meal.”

👉 Action step

Review your insurance portfolio. If you’re considering a ULIP, compare the numbers with Term + MF before committing. If you already hold a ULIP, calculate its charges and returns — you might want to rethink.​​

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