When it comes to buying an insurance plan, there are two common plans, namely the traditional insurance plan & ULIPs. While both of them have their own pros & cons, it is important to have a better understanding of the two plans. Though both plans include life insurance coverage, they still differ on certain parameters, such as benefits, investment options, structure, etc. With the help of this article, let us have a look at the differences between the two plans.
Contents
What is ULIP?
Unit Linked Insurance Plan is a financial tool that offers a combined benefit of life coverage & investment. A part of the premium is allocated towards life insurance, which provides financial security to the family members of the policyholder in case of their sudden demise. & the remaining premium is allocated towards investment, i.e. debt, equity, or balanced funds, depending upon the financial objectives & risk appetite.
What is Traditional Insurance?
This plan offers a combination of life coverage with assured returns. By investing in low-risk investment plans, you get guaranteed returns along with a bonus once the policy tenure is completed. This implies it includes a life insurance plan, where in case the death of the policyholder occurs, the amount of the death benefit is paid to their nominees. Additionally, these plans also ensure assured returns, making the plan suitable for those who are reluctant to accept risks & prefer assured growth over returns.
Difference between Traditional Insurance Plan & ULIP
Provided are the differences between a Traditional Insurance Plan & ULIP:
| Basis of Difference | Traditional Insurance | ULIP |
| Type | It offers pure life insurance coverage. | It involves insurance coverage with investment benefits which are linked to the market. |
| Investment Objective | It offers fixed returns for longer tenures. | It is a long-term investment plan which helps generate market-linked returns with a dual benefit of insurance. |
| Nature of Return | It offers assured returns & low risk. | Returns here are variable depending on the performance of the market. |
| Control on Investment | There is no option to allocate the funds or associated risks. | It allows for the choice of investments & to switch between the funds, further offering flexibility. |
| Use of Funds | Premium here is allocated towards insurance, expenses, & low-risk investments. | Premium here is allocated towards insurance, expenses, & market-linked investments. |
| Returns | Lower | Variable, as it is linked to the market. |
| Flexibility | Not flexible | It allows for allocating funds between insurance & investment. |
| Tax Benefits | Can be availed under section 80C & 10(10D) of the Income Tax Act, 1961. | Can be availed under section 80C & 10(10D) of the Income Tax Act, 1961. |
| Lock-in Period | Till the time policy matures | Minimum of 3-5 years |
| SIP Mode | Not available | Available |
| Transparency | Low | High, as it offers regular updates. |
| Partial Withdrawals | Not possible | Possible with terms & conditions |
| Charges | Lower | Higher |
| Investment | Fixed income securities | Market-linked funds |
| Risk | Lower risk, hence stable returns | Higher risk is linked to the market |
| Liquidity | Limited | Partial withdrawals are allowed once the lock-in period is completed. |
Features of Traditional Insurance
Provided are the features of traditional insurance:
- Assured Returns:
As this plan is not dependent on the market fluctuations, it offers assured returns.
- Low-Risk Investment:
This plan is best suited for those who are reluctant to take risks.
- Loan Facility:
It offers you borrowing against the cash value.
- Diversification:
It includes many plans such as endowment plans, money back plans, whole life plans, etc., to cater for the different financial requirements.
Features of ULIPs
Provided are the features of ULIPs:
- Market-Linked Returns
A part of the premium is allocated towards the market-linked securities, such as debts, equities, or both, where returns are dependent on the performance of the market.
- Flexibility
ULIPs offer an option to switch between the funds to the policyholders depending upon the risk tolerance level or market fluctuations, etc.
- Partial withdrawals
Once the lock-in period of 5 years is met, it offers an option to withdraw funds partially.
- Tax Benefits
The premium amount is eligible for deduction of tax u/s 80C, & the maturity proceeds are exempt from tax u/s 10(10D).
Who Should Invest in Traditional Insurance?
The following should invest in a traditional insurance plan:
- If you are a risk-averse individual who is not willing to take risks & does not want to deal with market fluctuations.
- If you want to have a regular source of income, opt for a traditional plan, such as a cashback endowment plan, a money-back plan, etc.
- If you are looking for a bonus or any additions to your current plan, opt for a traditional plan.
Who Should Invest in ULIP?
The following should invest in a ULIP:
- Opt for a ULIP if you want life coverage along with wealth generation.
- If you want to invest in liquid funds, invest in ULIPs. This is because it allows for an early withdrawal of funds once the lock-in period expires.
- If you don’t want expensive investment plans & want to have higher returns, opt for ULIPs.
- If you want to have control over your investments by switching between the funds depending on their performance, opt for ULIPs.
What to Choose: Traditional Insurance Plan or ULIP?
The selection of a plan depends on the financial objectives & the policyholder’s choice.
- Choose a traditional Plan if:’
- If you are not willing to accept risks, i.e. a risk-averse individual.
- If you want assured returns.
- If you want to invest in low-risk funds along with some insurance coverage.
- Choose ULIP if:
- If you require the dual benefit of insurance & investment.
- If you seek flexibility while choosing investment plans.
- If you are willing to accept high risks & get high returns by investing in market-linked funds.
Conclusion
To choose a plan between Unit Linked Insurance Plan & a traditional insurance plan, one should consider certain factors, such as investment preferences, financial objectives, risk tolerance level, flexibility, liquidity, etc. Having a complete knowledge of these will help you choose a plan that well aligns with your choices.
