This is the most over-sold mistake in Indian household finance. An agent shows you a plan that 'gives you life cover and returns', and it sounds efficient, two birds with one stone. In reality it is one stone that hits neither bird cleanly. The cover is small for the premium, the returns are dragged down by charges, and your money is locked. Understanding why is the difference between protecting your family properly and funding someone's commission.
What each product actually is
| Term insurance | ULIP / endowment | |
|---|---|---|
| What it is | Pure life cover | Insurance plus investment bundled |
| Cover for the premium | Very high (₹1 crore for a few thousand a year) | Low (cover is a fraction of a term plan) |
| Charges | Just the premium | Premium allocation, fund management, mortality, admin |
| Returns | None, it is protection, not investment | Market or fixed, after heavy charges |
| Lock-in | None beyond the term | 5 years minimum, often longer |
| Who it suits | Almost everyone with dependents | Very few people |
The key number is cover for the premium. A healthy 30-year-old can buy ₹1 crore of term cover for a few thousand rupees a year. The same premium in a ULIP might buy a fraction of that cover, because most of your money is going into the investment account and the charges around it. If your family needs ₹1 crore to be safe (and our term cover guide shows how to find that number), only the term plan actually gets them there.
Why bundling costs you twice
- You under-insure. Because a ULIP's cover is small for the premium, families who buy them are usually nowhere near the cover they actually need. The protection, the whole point of insurance, is the part that suffers most.
- You under-invest. ULIP charges (premium allocation, fund management, mortality and admin charges) eat into returns, especially in the early years. The same money in a low-cost index fund keeps far more of the market's return for you.
- You lock yourself in. ULIPs carry a 5-year lock-in, and surrendering early often means getting back less than you paid. A term plan plus a mutual fund keeps your investment liquid and your cover intact.
Frequently asked
What to do next
- Work out the cover your family needs with the term cover calculator, then buy a plain term plan for that amount.
- Invest what you would have overpaid for a ULIP into a low-cost index fund instead.
- If you hold a ULIP or endowment plan, check its lock-in and surrender value, and plan an exit once your term cover is in place.
- Treat 'return of premium' and 'guaranteed return' insurance pitches with caution, and run the maths before signing.
