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I have been a strong advocate of the fact that you should keep your insurance separate from investments…

  • Buy a pure term plan to cover life (for earning member)
  • Buy a health insurance to cover self and family (even if you have a company cover)
  • Invest through MF, Equity, PF, NSC, etc..

Post Budget, there’s been a lot of noise on the tax free status of ULIPs vs taxability of equity funds, Here is a comparison to help you understand the difference…

ULIP MF +  Term Plan Difference Diff %
A: Regular premium / SIP mode
Amount Invested over 20 years          50,00,160               50,00,160                        –
Monthly ULIP premium / SIP amount                20,834                     20,105
Monthly premium on term plan                         –                           729
Life cover (sum assured)          25,00,000               25,00,000                        –
Value at Maturity (pre tax) 8% return          97,15,135            1,19,21,204        22,06,069 23%
Post tax value at maturity          97,15,135            1,12,21,603        15,06,468 16%
B: Single premium / lumpsum mode
Amount invested          20,00,000               19,02,472             -97,528
Premium on term plan                         –                     97,528              97,528
Life cover (sum assured)          25,00,000               25,00,000                        –
Value at Maturity (pre tax) 8% return          67,69,948               93,73,104        26,03,156 38%
Post tax value at maturity          46,57,724               86,36,041        39,78,317 85%


  • Since insurance illustrations don’t go beyond 8% CAGR return projections, we have considered only 8% return for both options. As returns increase, the difference between both options will also increase.
  • The “person insured” (Investor) is assumed to be a 42 year old Male for premium calculations of both the ULIP and the Term Plan.
  • In case of ULIPs, the capital gains are exempt from LTCG Tax, only if the Sum Assured is at least 10 times the premium paid. Most modern ULIPs do not offer a Sum Assured 10 times the Premium paid in Single Premium Paying mode. Thus, the capital gains in Single Premium Paying mode of ULIPs are Marginally Taxed (Taxed as per the Income Tax-Slab).
  • The Income Tax-Slab is considered to be of 30% (Without Surcharge) for the calculations. LTCG taken at 10%.
  • All Mutual Fund investments are assumed to be in Equity based schemes. (Taxation-wise asset class is Equity)
  • The investor is assumed to survive the entire period of 20 years


While the numbers make the case clearly enough on what is better for investors, here are a few more points to think through carefully on the debate of ULIPs vs MFs:

I believe Mutual funds offer much more transparency in Performance and Charges, AMCs are much more transparent about their day-to-day operations like stocks entry/exit or daily NAV calculation or pretty much everything else.  . All AMCs are required to publish the Total Expense Ratio or TER for all Mutual Fund schemes. Whereas ULIPs have a few distinct charges like; Premium Allocation Charge/Rate, Fund Management Charges, Policy Administration Charges, Mortality Charges, Miscellaneous Charges, Partial Withdrawal Charges, Switching Charges, Discontinuance Charges, etc. Such charges are also usually hidden behind a thin veil of continuing misrepresentation.

ULIPs are a combination of two very different financial concepts; namely Investment and Insurance. The stark difference is; Investment is a choice. You can choose whether to invest or not. Insurance is a necessity.

Mutual Fund is an unparalleled investment instrument when it comes to operational flexibility. Growth/Dividend Pay-Out/Dividend Re-Investment Options, Partial Withdrawals, Systematic Investment Plans (SIPs), Systematic Withdrawal Plans (SWPs), Dividend Transfer Plans (DTPs), Intra-AMC switches, etc are various basic features which enable all Mutual Fund schemes to be operationally flexible. Most of the features listed above cannot be availed with a ULIP. Some of them may be available, but usually, they come with one charge or another.

Due to an inherent nature of the concept of maturity and other terms and conditions associated with them, most ULIPs are not open-ended. Most ULIPs can be invested in at any point of time, but the exit is determined by the policy term. Thus they do not have a requirement to perform well regularly. All open to investing at any time Mutual Fund schemes are truly open-ended. Such schemes can be invested into or redeemed at any point of time (Subject to Exit-Load of each Mutual Fund scheme). Thus Mutual Fund schemes have an implicit requirement to perform well regularly to be successful. I believe that this lack of discipline is what leads most ULIPs to under-perform as compared to the respective category of Mutual Fund schemes. Plus, if I look at the industry average, no category of ULIPs has out-performed a Mutual Fund category in a long period of time.

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