Insurance can also be distinguished between Unit Linked Insurance Plans (ULIP) and traditional or conventional plans. Before buying one has to be clear on the choice of the product. This can be clear based on your objectives.
ULIPs are popular because they are combination of insurance and investment in a single product. ULIPS are market-linked, and are likely to deliver higher returns based on the market conditions.
Term plan, endowment and whole life insurance policies come under traditional plans. These are considered risk-free, as they provide fixed returns in case of death or at the maturity of the term.
Here is a comparison between ULIP and Traditional Plans
|Description||ULIPs are instruments which provide both protection and savings along with investment options.||Traditional Insurance plans usually offer guaranteed maturity proceeds and they invest in low risk return options.|
|Flexibility||ULIP provides you with investment options based on your risk profile.||Traditional plans do not have investment options. Your funds will be invested as per the fund details.|
|Transparency||Most of the ULIPs allow you to track your portfolio. Individuals will get intimation on the fund on regular basis.||Your investment premium is common with the fund. Hence you cannot track individual portfolio.|
|Withdrawal||ULIP allows you to withdraw from your fund a few years into the plan. A lock-in of 5 years is applicable.||There are restrictions on withdrawal and the losses, could be heavy, if you opt for the same.|
|Switching options||Individuals can change your investment fund as being offered by the policy.||Individuals are not allowed to change fund as it is decided by the insurance company.|
|Maturity||At maturity, one can redeem units at the prevailing unit prices||At maturity, policyholder will get the sum assured plus bonuses, as per the plan.|
ULIP returns are based on the type of funds you choose, returns might be lower if you invest in the money market scheme because of the various charges. Also, it does provide decent insurance coverage. ULIPs provide you an insurance coverage of around 10 times the annual premium paid.
Traditional plans offer you coverage based on the product. Term insurance offers you heavy insurance coverage that can meet all your requirements, in case of death. However, you do not get the amount invested back. Endowment plans offer less insurance, but give an investment option as well.
Interestingly, both the above offer you tax savings under Sec 80C of the Income Tax Act.