If you are a new investor, then terms like ULIP and traditional insurance might seem a bit too technical. However, understanding the difference between the two is important, if you want to plan your long-term and short-term financial investments.
ULIP refers to Unit Linked Insurance Plan. The ‘unit’ in question here is the unit of an equity market instrument, namely shares and stocks. ULIPs offer more than traditional plans in the quantitative sense. It offers insurance and investment mixed into one unique product.
However, that might not necessarily mean that it’s the right choice for you. So, how do you decide where to put your money? We put up a comparison to make it easier for you to understand.
How Is ULIP Better For You?
ULIPs plan work in a different manner as compared to traditional insurance plans. Here are some examples:
#1 Plan components
As mentioned previously, a ULIP plan indicates investment in equity market units. However, that is not all. It offers protection (life insurance) as well as investment, both combined into one product. In comparison, traditional insurance plans only offer life protection and have limited capabilities when it comes to investment.
#2 Money utilization
The premium paid on a ULIP plan is directed towards meeting fund allocation charges, insurance cover, and equity investment. In a traditional insurance plan, the money is directed towards insurance cover, low-risk instruments like bonds and debentures, and miscellaneous expenses.
#3 Return on investment
Since ULIP uses equity market instruments, the percentage of return on investment is higher. In comparison, traditional plans invest the money in debt instruments that offer 6-8% return, limiting the return on investment. However, the risk profile in a ULIP plan is higher than that of a traditional insurance plan, where it is rather secure.
A ULIP plan offers flexibility, in the sense, that you can decide the proportion of your investment in equity and debt markets. Based on your risk appetite, you can decide whether you want an aggressive portfolio (more inclined towards equity) or a secure portfolio (more inclined towards debt). In contrast, a traditional insurance plan does not offer any flexibility. There is no transparency in investment and certainly no option provided to customers.
#5 Minimum investment period
ULIPs generally operate on a lock-in principle. The lock-in period indicates a period of 3-5 years from the date of the first investment, wherein the money cannot be withdrawn. If withdrawn, only a part of the original investment is returned and no return on investment is provided. This is done to ensure that there is a minimum return on investment and the expenses of the allocation are covered. In contrast, a traditional plan has no lock-in as such. The entire period of investment will need to be maintained and no pre-maturity deals can be made.
The main reason why a ULIP behaves differently than a traditional plan is the difference in objective. A ULIP acts as a long-term investment option in addition to nominal insurance cover. In contrast, a traditional plan offers insurance cover as the primary benefit with investment as a bonus. The investment option on traditional plans offers low returns and is geared towards offering more security.
#7 Maturity benefits
When a ULIP matures, it usually offers the option to redeem the units purchased initially. The units are redeemed at the price prevailing at the time of redemption. In addition, there might be loyalty benefits or bonuses, depending on the policy. Traditional insurance, on the other hand, offers fixed returns. At the onset of the policy, the maturity benefit is declared. There might or might not be additional bonuses. Unlike ULIP, a traditional insurance guarantees the sum assured from the very beginning.
Why Should ULIP Be On Your Top Priority List?
A ULIP offers the opportunity to invest in the equity market to those who are interested in a long-term investment plan. While a traditional insurance plan also offers a similar offering, it is more interested in the insurance cover rather than wealth maximisation. The ULIP, on the other hand, offers insurance cover as an additional feature, with wealth maximisation being the main priority. Additionally, the flexibility found in ULIP plans offers more control than in traditional insurance.
The best ULIP plans in 2018 look to offer transparent fund allocation, maturity benefits, and greater return on investment than a traditional insurance policy. That’s why, if you want more control on how your money is invested, you need to opt for a ULIP. To get the best ULIP quotes, head on to Coverfox.com and compare the top plans in the country.