What are Linked & Non-Linked Insurance Plans?

2023-06-16

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It is natural to compare options before you buy something, expecting to choose the best out of all that’s available and get the best price for it. The same stands true when we are buying an insurance policy.

There are several different types of life insurance policies available in the market, all intended to meet customers' different requirements and needs. When buying a policy, knowing the difference between linked and Non-Linked Policies will enable you to make the right choice according to your specific needs.

The two kinds of insurance plans, non-linked and linked, promise to provide life cover and returns or a combination of both. It can be confusing to choose from all the options available, but with an understanding of how these insurances work, you will be able to make the right decision.

Key Takeaways

The two kinds of insurance plans, non-linked and linked, promise to provide life cover and returns or a combination of both.
Linked Insurance Plans are often referred to as an insurance-cum-investment product.
Non-linked Insurance Plans are traditional plans unlinked to the stock market, with low-risk returns.
Linked plans are good for financial growth, but non-linked are better for those looking for stability with low risk.
The choice between linked and non-linked insurance plans depends on your financial goals and risk tolerance.

What are Linked Insurance Plans?

Linked Insurance Plans are often referred to as an insurance-cum-investment product. These plans are linked to the stock market, and their returns are influenced by market fluctuations. Therefore, bonuses come at the insurer’s discretion. ULIPs or Unit Linked Insurance Plans that pay dividends or bonuses can be classified as linked insurance policies.

How Does a Linked Insurance Plan Work?

Linked insurance plans, also known as Unit Linked Insurance Plans (ULIPs), combine life insurance coverage with investment potential. Here's how they work:

Payments and Allocation:
- You pay regular premiums towards the ULIP.
- A portion of the premium goes towards life insurance, providing a death benefit for your beneficiaries if you pass away during the policy term.
- The remaining portion is invested in the financial market, typically through units of funds offered by the insurance company. These funds can be equity (stock market), debt (bonds), or balanced (mix of both).
Investment and Growth:
- The unit price fluctuates based on the performance of the underlying investments in the chosen fund.
- As the unit price increases, the value of your investment grows.

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Case Study of Linked-Insurance Plans

Kumar purchased a ULIP for a 15-year term. He pays an annual premium of ₹75,000. The policy has charges of ₹15,000 annually, leaving ₹60,000 for investment. He chooses Fund B, which has a starting NAV of ₹80 on his purchase date.

Therefore, the total units he receives are Invested Amount / Net Asset Value = ₹60,000 / ₹80 = 750 units.

Over the 15 years, Kumar has accumulated an additional 3,250 units from his invested premiums. So, his total number of units becomes 4,000 (750 + 3,250).

Now, let's see how death and maturity benefits are paid under Kumar's policy.

Death Benefit:

A ULIP death benefit can be:

Higher of the sum assured or the fund value.
Sum assured plus the fund value.
- Let's assume:
  - The insurer pays the higher amount (sum assured or fund value) as the death benefit.
  - The sum assured is eight times the annual premium.
  - The NAV on Kumar's passing is ₹100.

If Kumar passes away during the active policy period, his family will receive a higher sum than the sum assured and the fund value. Suppose he has 3,000 units at the time of his passing.

Sum Assured = 8 x Annual Premium = 8 x ₹75,000 = ₹6,00,000

Fund Value = NAV x Number of Units = ₹100 x 3,000 = ₹3,00,000

Since the Sum Assured is higher, the insurance company will pay ₹6,00,000 to Kumar's family.

Maturity Benefit:

If Kumar survives the policy term, he'll receive the fund value based on the NAV on the maturity date. Let's assume the NAV is ₹100. So, the fund value (the amount he receives) will be:

Fund Value = NAV x Number of Units = ₹100 x 4,000 = ₹4,00,000

Therefore, the insurance company will pay a maturity benefit of ₹4,00,000 to Kumar.

What is a Non-linked Insurance Plan?

Non-linked insurance Plans are traditional plans that are not linked to the stock market. They provide low-risk returns, a well-defined maturity amount, and bonuses. A Term Insurance or an endowment policy can be classified as a non-linked insurance policy.

How Does a Non-linked Insurance Plan Work?

Unlike their market-linked counterparts, non-linked insurance plans focus solely on providing a guaranteed payout in case of the insured's death during the policy term. They offer a straightforward approach to insurance, prioritising protection over potential returns.

Case Study of Linked-Insurance Plans

Sarah decided to pursue a 20-year term life insurance policy. This is a non-linked plan, so the payout isn't tied to market performance. She pays an annual premium of ₹40,000. Term life insurance typically has no investment component, so the entire premium goes towards coverage.

Death Benefit: The key benefit of a term plan is the death benefit. In case of Sarah's unfortunate passing during the policy term, her beneficiary will receive a pre-determined sum assured amount. This amount is guaranteed by the insurer, regardless of the company's performance.
Let's assume the sum assured in Sarah's plan is ₹10,00,000. If Sarah passes away while the policy is active, her beneficiary will receive this fixed amount of ₹10,00,000, irrespective of how long the policy has been running.
Maturity Benefit: Unlike a ULIP, a term life insurance plan doesn't offer a maturity benefit. Since the entire premium goes towards coverage, there's no investment component. So, if Sarah survives the 20-year policy term, the policy simply matures, and no payout is received. However, she has gained the peace of mind of knowing her beneficiary would have been financially protected in case of her untimely demise.

How Do Linked Plans Differ From Non-linked Plans?

Here is a tabular comparison of the policies to help you understand the difference between linked and non-linked insurance.

Feature	Linked Plans	Non- Linked Plans
Investment Flexibility	High (choose funds based on risk appetite)	Low (limited or no investment choices)
Maturity Payouts	Market-linked (unit value + bonuses)	Guaranteed sum assured (fixed payout)
Transparency	High (track portfolio, receive updates)	Low (no investment component, limited tracking)
Partial Withdrawal	Possible (limits may apply)	Not Allowed (loan against policy in some cases)
Switching Options	Can switch between funds within the plan	Not Allowed
Top-up Option	Available (increase premiums with additional funds)	Not Allowed

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Factors to Consider When Choosing Between Linked & Non-Linked Insurance Plans

Confusion is only natural when both plans have their own benefits and limitations. You should decide considering your own requirements and time frame. Here is how:

You should be aware of your risk tolerance and how much market fluctuations you can take on. Those who are looking for stability should go for non-linked, but growth-seeking individuals may find ULIPs better.
What is your investment goal? Are you looking for wealth accumulation or financial protection? The answer to these questions will help you decide which plan to choose.
Since linked plans work on long-term investment, you should know what time horizon you are planning to invest for.
If you experience sudden financial needs and require a flexible plan, linked plans can offer you the advantage of partial withdrawal.
Since both plans come with tax exemptions, it’s better to check which one offers you better tax savings.

Which Policy Should You Choose For Your Investment Planning?

Your investment decision should first and foremost depend on your investment goals and, secondly, on your risk profile. If you are open to taking risks, then market-linked plans can get you good returns over a prolonged investment period. On the other hand, if you are averse to taking risks, go for non-linked plans that offer steady buy guaranteed returns.

Both linked and non-linked insurance plans have their benefits and limitations. Research and careful analysis can help you choose a plan that fits your financial goals. Canara HSBC Life Insurance offers a linked insurance plan that offers returns customised to your needs through flexible investment fund options and multiple portfolio strategies.

Wrapping Up

Choosing between linked and non-linked insurance plans depends on your financial goals and risk tolerance.

Linked Plans: If you're comfortable with market fluctuations and seek potential for higher returns, linked plans might be a good fit. However, remember they come with inherent risks.
Non-Linked Plans: For those prioritising guaranteed protection and steady returns, non-linked plans offer peace of mind with a predetermined payout. They might not provide high growth but come with lower risk.

By understanding the core differences between these plans and carefully considering your needs, you can decide to choose the one that best suits your financial situation and goals. Remember, consulting a financial advisor can be beneficial for navigating your options and tailoring a plan that aligns with your specific circumstances.

Glossary

Net Asset Value (NAV): The unit price of a life insurance plan linked to the stock market. It reflects the value of the underlying investments held by the plan.
Death Benefit: The payout the beneficiary receives in case of the policyholder's death during the policy term.
Maturity Benefit: The policyholder receives a payout upon surviving the entire policy term.
Unit Linked Insurance Plan (ULIP): A type of linked insurance plan that combines life insurance coverage with investment in units of funds.
Term Insurance: A type of non-linked insurance plan that provides a death benefit only if the policyholder dies within the policy term. There is no maturity benefit.

FAQs Related to What Are Linked & Non-Linked Insurance Plans

ULIP: combines life insurance with market-linked investments. You get a death benefit, and the potential for higher returns, but the risk is also higher.
Non-ULIP: Traditional life insurance plans offer guaranteed benefits but lower returns. They focus solely on life coverage and do not include an investment component.

A unit-linked insurance plan (ULIP) is a two-in-one product that combines life insurance coverage with investment opportunities.

Linked benefit insurance is a broader term that could encompass ULIPs. It refers to any insurance plan where the benefits are linked to an underlying investment, like stocks or bonds.

Both are good investment options. However, the best option can be chosen based on your needs. Here is the main difference to help you decide.

ULIP: Offers growth potential but carries market risk. You have more control over investments.
FD: Provides guaranteed returns but lower than ULIPs (if they perform well). They are safer but less flexible.

It depends. ULIPs can be good for:

Long-term goals: They have growth potential for retirement or wealth building.
Risk tolerance: You're comfortable with market fluctuations.

However, ULIPs might not be ideal for:

Short-term goals: Need guaranteed returns in a short timeframe.
Low-risk appetite: Don't want market volatility.

Always compare plans and understand the charges before investing.

Disclaimer - This article is issued in the general public interest and meant for general information purposes only. The views expressed in this blog are solely those of the writer and do not necessarily reflect the official policy or position of Canara HSBC Life Insurance Company Limited or any affiliated entity. We make no representations or warranties of any kind, express or implied, about the completeness, accuracy, reliability, suitability, or availability with respect to the blog or the information, products, services, or related graphics contained in the blog for any purpose. Any reliance you place on such information is therefore strictly at your own risk. You should consult with a qualified professional regarding your specific circumstances before taking any action based on the content provided herein.