A ULIP is a Unit Linked Insurance Plan which provides both, insurance as well as investment options within the same plan. The very purpose of a ULIP is to provide the added benefit of life insurance cover along with an option to grow wealth over the long run. The benefits of a ULIP scheme are profound. Ranging from funds switching, premium allocation, surrender option, multiple rider add-ons, top-up facilities, etc. A ULIP scheme has it all.
A Traditional Insurance Plan was a popular choice among investors before the advent of ULIPs. These plans provide benefit in the form of lump sum with bonuses after a specified period of time or upon death. The premiums under such plans are fixed and the benefit is guaranteed irrespective of death or survival of the life assured. Being a risk-free product, it is an excellent option to avail all the benefits of life cover, investment, fixed income and tax-savings.
In this table, we elaborate the features and benefits offered by ULIPs as well as the Traditional Insurance Plans.
| Criteria | ULIP | Traditional Insurance Plan |
|---|---|---|
| Type | Invest cum insurance scheme. | Pure insurance scheme. |
| Goal | Provide insurance plus investment benefit over the long term. | Provide fixed returns over the long term. |
| Regulatory Body | Insurance Regulatory and Development Authority of India. | Insurance Regulatory and Development Authority of India. |
| Returns | Returns are market linked and are dependent upon the choice of investment funds and investment style. Offer low returns. | Fixed Returns since the risk involved is low. |
| When should you buy? | When you want life cover along with good returns over the long term. | When you want fixed income returns along with life cover over the long term. |
| Premium Allocation | The premium is split between expenses, insurance cover and investment funds. | The premium is invested in fixed income debt funds and life cover. |
| Charges | Mortality charges, fund management charges, funds switching and administrative charges, insurance premium allocation charges, surrender charges, partial withdrawal charges. | Mortality charges and premium allocation charge. |
| Systematic Investment Plan | Yes | No |
| Flexibility | Highly flexible as you have the option of funds switching and premium allocation. | No flexibility. |
| Lock-in Period | 5 years mandatory. | Locked till maturity |
| Funds Switching | Yes | No |
| Tax Savings | Yes, as mentioned in Section 80C of the Income Tax Act, 1961. | Yes, as mentioned in Section 80C of the Income Tax Act, 1961. |
| Ideal For | Long Term Investment Horizon | Long Term Investment Horizon |
Generate Capital: A ULIP is an investment vehicle for investors who want to generate capital and protect themselves at the same time.
Liquidity: A ULIP comes with an option of partial withdrawal post the mandatory 5 year lock-in period.
Higher Returns: New generation ULIPs have been revised by IRDAI and are relatively cheaper as compared to the traditional ULIPs. The charges are less expensive while the returns are even higher than a few mutual funds.
Flexibility: A ULIP investor has the flexibility to switch their investment funds and completely revise their investment portfolio in case they are not satisfied with the performance of the funds.
Less Risk
We all know that ULIPs are market linked plans, hence they come with a greater risk in times of market volatility. On the contrary, Traditional Insurance Plans are completely risk-free and a viable investment option for policyholders seeking primarily security and savings.
Regular Income
A traditional insurance plan is an excellent source of regular income. A money back or cashback endowment plan provides the option of fixed income in the form of death, maturity or survival benefit.
Bonuses and Guaranteed Additions
A traditional plan provides bonuses and guaranteed additions over the policy tenure. The declaration of bonus and additions depends upon the insurance provider.
In conclusion, one can state that a ULIP scheme is ideal for a young investor who can handle adequate appetite for risk while a traditional insurance plan is suitable for a risk-averse investor.
Is ULIP a good investment option?
Yes, a ULIP is an excellent investment option for an individual who seeks the dual benefits of investment along with life insurance cover.
What are traditional plans?
A traditional plan is an endowment savings plan which provides a fix income as a benefit over a specified period of time. This amount is given upon maturity, death or survival.
What is the difference between ULIP and SIP?
A ULIP is a Unit Linked Insurance Plan, it is a complete self-functioning fund by itself. A SIP is a Systematic Investment Plan, it is a mode of investment by which you put money at regular intervals into a mutual fund. The major difference between ULIP and SIP is that ULIP offers life cover whereas SIP doesn’t offer any such facility.
How is ULIP different from mutual fund?
A ULIP is a combination of investment and insurance with a mandatory lock-in period of 5 years while a mutual fund is a pure investment product which invests primarily in equities.
What are the types of insurance plans?
To name a few, different types of insurance plans are life insurance plans, ULIPs, child plans, money back/cashback plans, whole life insurance, term insurance, endowment plans, etc.
What is a guaranteed income plan?
A guaranteed income plan is a scheme where the policyholder is entitled a guaranteed return upon their investment irrespective of market or fund performance.
How does a ULIP plan work?
When you invest in a ULIP scheme, a part of the premium is invested to provide life cover, expenses while the remainder is invested in investment funds of your choice and investment style. Over the initial years, the ULIP will focus on providing equal allocation to life cover and insurance. Over the later years, the funds are switched accordingly as per the overall performance of the fund. The value of the fund is utilised to create a corpus amount for maturity and insurance in case of death of the policyholder.
What is a non ULIP policy?
All traditional insurance plans such as endowment plans and money-back plans, etc. are Non-Linked Plans. These plans offer low risk returns and are not linked to the stock market in any way. It also offer a good maturity and bonus amounts.
What is an insurance plan?
An insurance plan is an agreement between the insured and the insurer to offer financial protection to the insured in case of any unforeseen situations. The insurer promises to pay the sum assured wherein the insured pays the premiums of the policy on time.
