Unit-linked insurance plans (ULIPs) are an integrated product that offers life cover and investment within the same policy. You may also top-up your premiums or switch from one fund to another when you invest in a ULIP. These plans also allow you to increase or decrease the life cover, surrender your policy, and include riders for comprehensive coverage.
On the other hand, traditional life insurance plans offer life cover, security, and fixed returns. These are one of the oldest financial products that are suitable for individuals who have a lower risk appetite. Traditional insurance plans are stable and risk-free investments where a majority of the corpus is invested in debt products. In case of your demise during the policy term, your beneficiaries receive death benefits. These are inclusive of the sum assured and bonuses if any. You cannot withdraw from an insurance policy before its maturity and pay a fixed premium during the entire policy term.
Traditional insurance plans ensure capital protection but often the returns are very low. On the other hand, over a longer period of time, the markets deliver higher returns, which make a ULIP policy profitable. Here are seven points that compare ULIPs and traditional plans to help you make an informed decision.
Traditional plans are an excellent option to procure life cover, which offers financial security to your family in case of your premature demise. In comparison, if you want to earn returns on your investment along with life cover, ULIPs are a better option.
Regular insurance plans provide fixed returns at the end of the policy term. ULIPs are able to help accumulate a higher corpus especially in the long-term due to the power of compounding.
When you invest in a traditional insurance plan, the returns are guaranteed at the time of maturity. Therefore, these products deliver low but guaranteed returns. One of the ULIP benefits, when compared to traditional plans, is that the returns on investment depend on the returns of the underlying asset. The underlying assets may include debt, equity, or money-market instruments. Therefore, the returns on ULIPs are not guaranteed, which make such insurance plans riskier than traditional policies.
If you have a low-risk appetite, you should procure traditional insurance plans that offer financial security in case of an untoward incident. However, if you are willing to assume a higher risk in the longer period of time, you must consider investing in ULIPs.
- Money utilization
The premium paid on traditional insurance plans is used towards administration expenses, life cover, and invested in low-risk financial instruments.
On the other hand, in ULIPs, a portion of the premium is used towards different charges such as premium allocation, administration charges, mortality charges, and fund management fees. The balance is then invested in different financial instruments such as equity, money market, and debt.
- Expense regulation
The Insurance Regulatory and Development Authority (IRDA) of India is the regulatory body governing the industry. Until 2010, there was no upper limit set by the IRDA towards the expenses charged by ULIP providers. However, after 2010, insurance companies have to follow the maximum expense limits set by the regulatory authority.
With traditional insurance plans, there is again no upper limit on the expenses. Therefore, the expenses are higher to manage.
ULIPs allow you to switch between your chosen assets during the policy term. This means that you may shift your investment from debt to equity and vice versa. Therefore, if you invest in an equity fund and the stock market declines, you may switch to a debt fund to protect your investment.
In comparison, traditional insurance policies do not provide any versatility. This makes these types of plans a little disadvantageous when compared to ULIPs.
- Lock-in period
The minimum lock-in period for a ULIP is five years during which you are not able to exit your investment. However, the maturity period of ULIPs is often longer ranging between ten and 15 years.
A traditional insurance plan has a long-term maturity, which may be 20 to 30 years. Unlike ULIPs, you are unable to exit a traditional insurance policy until its maturity. In case of your demise during the policy term, your beneficiaries receive the death benefits.
In most cases, the insurance companies do not provide information on the products where the premium is invested. However, the companies declare the Net Asset Value (NAV) based on the value of the underlying investments. This allows you to track the performance of the ULIPs.
However, traditional insurance policies do not provide any information about where the money is invested. Therefore, you have no transparency when you invest in such plans.
- Systematic Investment Plans (SIPs)
A ULIP allows you to invest through an SIP, which makes it easy to invest and inculcate investment discipline. SIPs are not available when you opt for traditional insurance plans.
Both ULIPs and traditional insurance plans provide tax benefits under section 80C of the Income Tax Act. However, the investment decision must be based on several factors after clearly understanding the ULIP meaning. When making your investment decision, you must consider your risk profile, investment horizon, financial objective, and age.