In life, you will have many goals, responsibilities and aspirations. Many of them need financial support, and some may arise due to financial wellbeing. Thus, investments are a major and important part of your modern life.
Nowadays, it's not just about saving your money and keeping it safe somewhere. You need to ensure the growth of your savings and only good investments will provide that. Traditional life insurance plans have been popular long-term investments for a very long time in India.
However, after ULIPs introduction, traditional insurance has been out of the popular list. But, should it be? What is the difference between ULIPs and traditional plans? Why would you choose one over the other?
Difference between ULIP and Traditional Life Insurance Plans
Though both are essentially life insurance plans, they are different from each other. The difference between ulip and the traditional plan is summed up in the table below.
|Meaning||Financial Protection + Safety of Invested Capital + Option of Bonus Growth||Financial Protection + Wealth Building + Bonuses|
|Investment Options||Safest fixed income securities and insurer’s funds||You are given the freedom to choose from investment options such as
- Equity fund
- Debt fund
- Hybrid (Mixed) funds
- Liquid fund
|Investment Risk||Almost zero risk. The returns are guaranteed in traditional plans.||This plan is linked with the market. Thus the risk depends on the choice of fund.|
|Lock-In period / Partial Withdrawals||Partial withdrawals are not possible. The policy acquires cash value after 3 years of continuous investment.||ULIPs have a lock-in period of 5 years. You can withdraw funds partially after the lock-in period is over.|
|Flexibility||Traditional plans have less flexibility. Sum assured is also fixed||Ulip has more flexibility regarding the premium payment term|
|Tax on Maturity||If the policy is purchased after 1st April 2012, and the yearly premium is more than 10% of the sum assured, then your policy can be taxable.||ULIPs purchased after 1.4.2012 will be taxable if the premium is more than 10% of the sum assured ** ULIP plan will also be taxable if the amount is more than 2.5 lakhs|
|Suitable Financial Goals||Daughter’s marriage, retirement safety for a spouse, legacy investments for children, income safety for elderly parents||Wealth building goals, child education and marriage, home buying, own retirement,|
Unit Linked Insurance Plans (ULIP): The Modern Life Insurance Plans
Apart from the plans stated in the traditional life insurance plans, there is another type of life insurance plan, known as ULIP. These ULIP plans differ from traditional plans as they have the investment component present apart from the life cover.
Why Invest in ULIP for Long-Term?
As stated already, ULIPs are good for a long-term horizon. It can help you achieve your long-term goals. Here is how
i. Power of Compounding
The longer you hold your ULIP, the more time your corpus will have to grow. ULIPs come with a lockin period of 5 years in which your funds stay untouched. This period also helps you to develop a disciplined savings habit.
ii. Market-Linked Growth
ULIP is a market-linked product. Thus, in ULIP plans, your money is invested in marketable securities such as equity, bonds, etc. The returns of your ULIPs depend on the fund’s performance in the market.
Due to this, ULIPs have the potential to earn very high returns than other investments. If its past performance is considered, ULIPs can give you a double-digit return as well.
iii. Beat Inflation in Long-Term
Inflation is the rise in the general price level of goods. Inflation is constantly increasing in the country, and there are high chances that it will continue to do so. This can cause your corpus to be insufficient.
ULIPs tend to generate returns that can combat inflation. Equities can help you earn returns that are above inflation.
Click Here to Use Power of Compounding Calculator
How ULIP Ensures Safety for Long-Term Investor?
Despite the high risk involved in equity, your ULIP can help you ensure the safety of your returns as well. ULIP plans such as Canara HSBC Life Insurance Invest 4G give you the advantage of 4 automated portfolio management strategies.
These are pre-defined strategies with which you can manage your risks and ensure the safety of your capital. These work on their own as per your defined instructions so that you do not have to get involved much.
Also, the longer you stay in Invest 4G, the more you are rewarded, thanks to its bonuses such as Loyalty additions and wealth boosters.
Traditional Life Insurance Plans
The main objective of a traditional life insurance policy is to maintain the financial stability of your family if you unexpectedly lose your life. Traditional life insurance plans generally include the following two life insurance plans:
- Endowment life plan
- Moneyback plan
1. Endowment Plan
It is a type of life insurance plan that offers you the benefit of life cover and savings. Thus, apart from covering for your life and providing financial security to your family after your death, an endowment plan helps you save money too. Through an endowment policy, you can inculcate a savings habit and create a good corpus for yourself.
The amount that you create through regularly saving, is given to you at the time of maturity, i.e., the time your policy duration ends.
You can invest in two types of endowment plans in India:
a) Participating Endowment Plan
b) Non-Participating Endowment Plan
Participating endowment plans offer compounded or simple reversionary bonuses over and above the guaranteed benefit amounts. Thus, participating policies can end up returning far more than the expected amount at maturity.
2. Money-Back Plans
This is a type of life insurance in which instead of getting a lump-sum amount on maturity, you will get your sum in instalments. In a money-back plan, you start to receive the benefits while the policy is still running. Thus, a part of the sum assured will be given to you after some years of the policy has passed as a survival benefit.
These policies can also include a bonus that will increase the maturity or death benefit amount from the policy.
You can use moneyback plans to create a reliable income stream for yourself or your family. Since the payments are exempt from tax, assigning the benefits to dependent family members enables tax-free income for them.
So, in a moneyback policy, you will receive money at the time of
i. During the policy
ii. At maturity or
iii. At the time of death
In the Money Back Advantage Plan from Canara HSBC Life Insurance, you receive 15% of the sum assured on the 5th, 9th, and 13th year of the policy. The remaining is given at maturity.
The death benefit is payable in full in case of your demise before maturity.
The difference between ULIP and traditional plan lies in the financial goals as well. Qualities of both the investments make them suitable for different financial goals.
Traditional life insurance plans such as endowment plans and guaranteed savings plans involve fixed and assured returns. The money you save through these plans can help to achieve goals such as a daughter’s marriage and education. Plus these plans are the best as a financial gift as well due to their tax-exempt status.
Money-Back plans, the plans that offer regular pay-outs can be aligned to ensure a good education for your child or support parents financially.
ULIP plans involve investment in the market. These can help you create a huge wealth in the long run. Thus, goals having a long-term horizon such as creating a retirement corpus, pension, leaving a legacy can be done through ULIPs. These can also be used to fund for child’s higher education.
Disclaimer: This article is issued in the general public interest and meant for general information purposes only. Readers are advised to exercise their caution and not to rely on the contents of the article as conclusive in nature. Readers should research further or consult an expert in this regard.