The first thing that comes to mind when talking about insurance is the protection it offers. Insurance companies over the years have added another essential component – “investment”, along with it. So while traditional insurance plans focus solely on the protective component, ULIP plans focus both on protection as well as investment.
Although both traditional policies and ULIP plans have their place, one common dilemma faced by many individuals is when it comes to choosing between the two. So here is everything you need to know to put to rest your ULIP versus traditional insurance plans dilemma.
Traditional insurance versus ULIPs: Key essentials to keep in mind
Before making the right selection one way or the other, it is essential to understand the essential parameters of both traditional insurance and unit liked insurance plans.
Know your investment perspective
Knowing your investment perspective can help you choose between traditional plans and ULIPs. If you are someone looking for a protective component, a traditional plan is more suited to your need than investing in a ULIP plan. However if you already have a life insurance plan in place, and need to broaden your protection and also look at investment options, a ULIP policy can just be the better option. Knowing the reason why you need insurance can help you make the ULIP versus traditional plan choice simpler than it may appear at first glance.
Understand the choice of investment
Endowment or traditional plans invest in safer debt instruments. They keep safety of investment paramount, while ULIP plans invest in both equity and debt instruments making the investment returns linked with the market. If you are someone with a low risk potential, a traditional policy is preferred compared to a high risk individual who can go in for a unit linked policy.
Focus on liquidity and withdrawal
Check if you will need to liquidate your insurance policy mid way in its tenure. Even if there is a slight possibility of such an eventuality, a ULIP plan may not be the right investment option. ULIP plans have a lock in period of five years, before which no such withdrawals are permissible. Traditional insurance plans however, come with no such lock in period and offer greater liquidity options in the event of a financial emergency.
Keep an eye on the returns
Being invested in safer debt instruments, traditional plans are low risk, but they offer lower returns as compared to ULIPs which offer market linked returns. So if returns are something you are focusing on, a ULIP can double up both as your protective and investment instrument rolled into one. On the flip side, traditional polices offer guaranteed or assured returns, something which ULIP plans are unable to offer owing to their market linked mechanism.
Quick comparison between traditional insurance and ULIPs
|Insurance Policy Features||Traditional or Endowment insurance plans||Unit linked insurance plans or ULIPs|
|Investment flexibility||Flexibility to choose between various funds and equity-debt component||No flexibility in selection of investment component|
|Returns||Guaranteed and assured returns.||Market linked returns|
|Liquidity||No partial withdrawals||Partial withdrawal option only after 5 year lock in period|
|Charges||Low charges||Come with additional charges including fund management fees and charges, premium allocation charges, policy administration charges etc|
|Suitable for||Suitable for low risk investors||Suitable for medium to high risk investors|
The bottom line
Choosing between ULIPs and traditional insurance plans requires due diligence and a selection must be made as per your reasons for investment and your profile. Both ULIPs and traditional plans offer advantages if you have opted for the right plan as per your financial plan and risk profile.
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