The market is currently loaded with several investment and insurance tools. However, there is no one-size-fits-all formula. What may work for your friend might prove inappropriate for you. Every type of investment option has pros and cons, which you need to analyze carefully and wisely before you make your choice, considering your requirements, targets, and risk appetite.
Differences between traditional investment plans and ULIPs:
In this article, we will discuss deeply the differences between a Unit Linked Insurance Plan (ULIP plan) compared to a traditional one to know which will suit you the best depending on your circumstances.
| POINT OF DIFFERENCE | United Linked Ins Plan (ULIP) | TRADITIONAL PLANS |
| STRUCTURE | This is a combination of both investment and insurance | This is exclusively an insurance tool |
| INVESTMENT | Debt, equity, or hybrid funds | Market-linked returns |
| FLEXIBILITY | Fund switching and flexible premium allowance | Fixed premium flexibility |
| TRANSPARENCY | Transparency in fund management | Fund management is not transparent |
| RISK MARKET | Market risk | The risk is comparatively limited |
| RETURNS | Offer potentially higher returns | Usually offer comparatively lower returns |
| CHARGES | Involves comparatively higher charges, including fund management costs | Comparatively lower charges |
| TAX BENEFITS | Allow tax benefits on both returns and premiums | Allow tax benefits on premiums |
| LIQUIDITY | Allow partial withdrawals | No partial withdrawals are allowed |
| LOCK-IN PERIOD | Comes with a standard lock-in period of 5 years or above | Usually, shorter lock-in periods prevail |
| SUITABILITY | Ideal for long-term investors with potentially higher risk appetite | Ideal for conservative investors who seek stability |
What is the ULIP plan?
A ULIP is a unique financial tool offering the dual benefits of insurance coverage and market-linked investments. The chief target of the ULIP is to provide additional benefits such as life insurance along with the possibility of creating wealth in the long run.
ULIP features
ULIP has redefined the market investment portfolio and has gradually gained significant popularity, not without reason. This sort of financial tool proves to be ideal for individuals seeking both market-linked returns and wealth creation opportunities in the long run, along with insurance protection coverage. Some of the significant features of ULIP include:
- Dual benefits of investment and insurance: ULIPs are unique as they offer insurance protection coverage along with market-linked investment opportunities. A part of the premium paid goes towards insurance coverage security while the remaining gets invested in various funds like equities, debts, etc., as per the choice and requirement of the concerned investor.
- Flexible: ULIPs offer the policyholders the opportunity to opt from several investment options based on their financial targets and risk appetite. These typically include debt funds, equity funds, balanced funds, etc., allowing them to maintain a diversified customized investment portfolio.
- Transparency: When investment charges, and performances are considered, ULIPs maintain considerable transparency. All the associated charges like the policy administration charge, fund management costs, premium allocation costs, etc. the disclosed upfront during policy issuance to ensure an informed investment.
- Fund switching: As an investor, you enjoy the opportunity to switch funds based on your choice and fund performance. You can accordingly reallocate your invested funds to optimize returns.
- Liquidity: ULIPs have a standard lock-in period of 5 years or more. This ensures disciplined wealth creation and wealth building in the long run.
- Tax benefits: ULIPs qualify for tax benefits. The premiums paid towards ULIPs qualify for tax deductions u/s 80C of the IT Act, observing certain limits. Moreover, the maturity proceeds also enjoy tax exemption u/s 10 (10D) of the IT Act, subject to terms and conditions.
- Riders: You can customize and enhance the coverage scope of your plan by adding suitable riders to the basic plan. Some popular riders include critical illness coverage, disability benefits, etc.
ULIP benefits
There are several essential ULIP benefits, including:
- Compounding benefits: ULIPs are ideal for long-term wealth creation with compounding benefits. This procedure earns returns on the initial principal along with the accumulated interest/returns.
- Market-linked growth: ULIPs offer investment opportunities in several market-linked funds like equities, debts, balanced, and hybrid funds. This allows exposure to various asset classes to ensure a diversified portfolio.
- Inflation: Since ULIPs grow with the power of compounding, it becomes favorable to combat inflation in the long run.
What is a traditional plan?
These plans include a single-time lump sum payment along with incentives after a specified period or upon death. The premium payable amount is pre-defined. This is a risk-free product, ideal for safe investment and savings.
Features
Some of the significant features of traditional plans include:
- Guaranteed returns: This is one of the primary features of traditional plans. They typically allow a fixed rate of interest for a specified time on the premiums paid, ensuring guaranteed returns on maturity, irrespective of the market performance.
- Death benefit: These plans allow death benefits to the designated beneficiary or nominee during any unfortunate event. It is usually a lump sum amount equivalent to the sum assured value or a combination of the accrued benefits and the sum assured.
- Maturity benefit: Traditional insurance plans offer maturity benefits similar to death benefits. However, the only difference here is that maturity benefits are given once the pre-defined policy term is completed. This benefit includes the fixed sum assured amount along with other guaranteed benefits and additions that are accrued during the plan term.
- Bonus: Traditional life insurance policies often offer the opportunity to earn specific additions or bonuses with the sum assured amount. These bonuses are offered in several forms like reversionary bonuses, terminal bonuses, guaranteed additions, etc. depending on the terms of the insurer.
- Premium payment: Premium payment options are flexible in the case of traditional plans. It can be a single premium, regular premium, or limited premium, based on the preferences and financial capacities of every individual investor. Based on these factors, you can even customize your plan to fulfill your financial targets.
- Benefits: The premiums paid for traditional insurance plans qualify for India tax deductions u/s 80C of the IT Act, maintaining certain specific limits. The death benefits or the maturity proceeds also qualify for tax deductions u/s 10 (10D) of the IT Act in India.
- Types: Some of the most popular types of traditional plans include endowment life plans, allowing both life insurance coverage with savings. The nominee or the beneficiary receives the death benefit in the case of any unfortunate occurrence. The other one is the money-back plan. Here, it offers periodic payouts to the investor during the plan term. The entire sum assured is paid out at prefixed intervals.
Conclusion
If you seek capital generation, liquidity, high returns, and flexibility in switching funds, then ULIP is your genre. On the other hand, if you require more security with a comparatively lesser risk involvement, regular income, and guaranteed returns and bonuses, then you should choose traditional plans.