February 22, 2024

Comparing traditional life insurance policies and ULIPs

Rohan and Raju were brothers who had similar goals to financially protect their family. They got together to discuss the significance of ULIPs, or unit-linked insurance plans and life insurance, intending to make better decisions.

Rohan started, “Raju, are you aware of what insurance policy is all about?

He explained, “Well, insurance is a financial instrument that endows a lump sum figure to the dependents on the occasion of the demise of the policyholder. It is a means to provide financial security to your beloved.”

In contrast, ULIPs are a kind of instrument that offers both insurance coverage and investment development. The premium paid is divided between life insurance and market-linked investments.”

Comparing ULIPs and traditional insurance policies

Flexibility

ULIPs: These plans provide a great deal of flexibility. Policyholders can choose between funds according to their risk tolerance, financial objectives, or market circumstances. They can also set the frequency of premium payments and make partial withdrawals if necessary.

Traditional Life Insurance: Such flexibility is typically lacking in traditional policies. Once the insurance is chosen, the premium payments and benefits are largely set.

Transparency

ULIPs: ULIPs promote great transparency by providing the funds’ performance where your premiums are periodically invested. Policyholders might track down the success of the assets and make better decisions depending on this.

Traditional life insurance plans may not provide the same amount of openness. They frequently do not disclose specific information about the underlying investments, making it difficult for policyholders to evaluate the success of their plan.

Risk and returns

Traditional policies at times provide assured returns, ensuring the insured or their particular beneficiary gets a specific amount regardless of market ups and downs. As an outcome, they are safer instruments for risk-averse individuals.

ULIPs: ULIPs are linked to the market and so their returns are impacted by the market’s performance. They have the potential to yield higher returns, however, they are subject to considerable volatility. As earnings are not assured, ULIPs are best matched for those willing to take up financial risks for potentially bigger benefits.

Tax benefits

Conventional plans as well as ULIPs both endow tax benefits for premiums paid as per Section 80 C. Moreover, the maturity amount is free of tax as per Section 10 (10D). Such tax benefits make both instruments appealing. 

Cost structure

Traditional Life Insurance: Traditional plans often offer lower premiums, making them ideal for people who value stability and low-risk investments. The vast bulk of the premium is used to provide insurance coverage.

ULIPs carry greater fees, especially for fund management and mortality. These costs can have an impact on total results, so policyholders should keep them in mind when making investing selections.

Maturity benefit

Traditional life insurance plans provide assured maturity benefits, which provide a fixed payout regardless of market conditions. This ensures financial security in adulthood.

ULIPs: The ULIPs maturity benefit is determined by the chosen funds’ performance. While they may give better returns, the amount collected at maturity is not guaranteed.

Lock-in period

Normally, ULIPs come with a lock-in of five years during which the holder of the policy cannot withdraw funds. Conventional plans, in contrast, may have a longer lock-in, which may differ from one plan to another. 

Liquidity

ULIPs: ULIPs provide liquidity in the form of partial withdrawals. Policyholders can take a portion of their invested money without relinquishing the policy, making it ideal for dealing with unexpected financial requirements.

Traditional life insurance plans often have limited liquidity alternatives, and surrendering the policy may result in a loss of benefits.

Nominee protection

Both regular life insurance plans and ULIPs protect nominees in the event of the policyholder’s death. Due to market-linked returns, ULIPs may give bigger payments, thus providing a wider financial safety net for the nominee.

Surrender value

After the lock-in period, ULIPs provide a surrender value, allowing policyholders to quit the plan if necessary. Traditional plans may have a smaller surrender value, making early withdrawals less appealing.

Premium allocation

ULIPs invest a greater percentage of the initial premium, which might be helpful for people wishing to accumulate money over time. The majority of the premium in traditional plans is allocated to insurance coverage.

Riders

Traditional life insurance policies frequently include riders such as critical sickness and accidental death protection. These riders can enhance the coverage and provide additional financial protection.

Short-term vs. long-term

Traditional life insurance policies are often long-term commitments, with policy terms lasting decades. ULIPs provide flexibility for shorter investment horizons, making them ideal for persons with changing financial objectives.

Unassured vs assured

Traditional plans provide guaranteed benefits, giving policyholders who desire stability peace of mind. ULIPs, on the other hand, provide non-guaranteed returns, making them more appropriate for investors who are comfortable with market risk.

Knowledge about market

ULIPs require some market knowledge for fund selection, asset allocation, and portfolio management. In contrast, traditional plans do not necessitate such investment expertise, as the returns are predetermined.

Fund linked options

ULIPs provide policyholders with a variety of fund alternatives, including equities, debt, and hybrid funds, allowing them to diversify their assets based on their risk tolerance and financial goals. Traditional plans may not provide this amount of investing flexibility.

Payments of the premium

ULIPs give policyholders the option of making single, regular, or restricted premium payments, which accommodates a wide range of financial capabilities and preferences. Traditional plans may include a set payment schedule for premiums.

Risk tolerance level

Because they incorporate market-linked assets, ULIPs are better suited for persons with a higher risk tolerance. Traditional plans are better suited to risk-averse investors who value stability.

Ending note

After a thorough debate, Rohan and Raju realised that, although standard life insurance plans provide security, ULIPs have the possibility for better returns and greater flexibility. They chose a hybrid of the two to safeguard their family’s financial future: a traditional plan for stability and ULIPs for development potential. In doing so, they achieved a balance that would secure their loved one’s financial security in the years ahead.

 

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