When it comes to buying insurance, there are a lot of options out there. It can sometimes get confusing when you’re presented with different types of insurance and you have to choose one that suits you. Insurance can be broadly classified into two main types, ULIP plans and traditional insurance plans. In this article, we’ll be discussing what these two types of insurances mean and their differences.
Unit Linked Insurance Plans (ULIP)
A ULIP plan or a Unit Linked Insurance Plan is a type of insurance product that combines the benefit of a usual insurance plan and the return potential of an investment. Most people out there are looking to invest their funds to build a corpus, and at the same time they also want to have some kind of insurance to protect their family if they pass away prematurely. Rather than having two different plans for these two purposes, a ULIP plan offers the chance of doing these two things under a single umbrella.
Traditional Insurance Plan
A traditional insurance plan is purely a life insurance or a term insurance plan. It provides a life cover, which means you pay your premiums and if you pass away prematurely, your family will receive the promised life cover as a lump sum amount. It is risk-free investment since your family will receive a fixed sum.
Main Differences between ULIP plans and Traditional Plans
Purpose and Objectives
ULIP: To offer insurance cover along with investment benefits. The main objective of such plans is to have a life cover as well as a long term investment option under a single umbrella.
Traditional Plans: It is purely an insurance plan that offers life cover. The main objective is to avail fixed returns in the long run.
Returns on Investment
ULIP: Since ULIPs are investment in equity instruments, the returns will be variable and dependent on market fluctuations. Usually, compared to other investment options, the returns are lower with ULIPs, but when compared to other insurance options, the returns are higher.
Traditional Plans: The returns for a traditional insurance plan are guaranteed since they’re linked with risk-free instruments. You’ll get a fixed return in the form of a death benefit or maturity benefit.
ULIP: ULIPs usually have a lock-in period of 3-5 years, which means you cannot withdraw your investment before the stipulated amount of time has passed.
Traditional Plans: A pure insurance plan is locked-in for the entire duration of its term.
ULIP: When it comes to ULIP plans, you have the flexibility of choosing what proportion of your premium you want to invest and what part you want to contribute towards your insurance.
Traditional Plans: There is no flexibility in this case. Your premium will go towards your life insurance.
When should you consider?
ULIP: Consider ULIP plans when you want a life cover as well as more than nominal return of investment over the long term.
Traditional Plans: Consider a traditional insurance epan when all you need is a robust life cover and nominal but fixed returns.
Both ULIP plans as well as traditional plans are beneficial, but you have to choose according to your investment needs. If you’re an individual with a higher risk appetite and are looking for a life cover as well, you can consider a ULIP plan. Also, if you already have equity linked investments and investments in mutual funds, then you can look into getting a pure insurance plan. The choice is yours.