ULIP vs Traditional Plans
ULIP AND TRADITIONAL PLANS : A COMPARISION
Further, the policyholder can also switch the units between the available funds in a unit-linked life insurance product based on prevailing market conditions. In a Traditional life insurance plan, the investment decisions are made by the life insurance companies, where the investment is done primarily in Government Securities and Corporate Bonds.
2) Transparency :
In a unit-linked life insurance product, before investing an individual should know the various charges upfront, namely:
• Premium Allocation Charge
• Fund Management Charge
• Mortality Charge
• Policy Administration Charge
• Surrender/Discontinuance Charge
• Switching Charge
• Redirection Charge
• Partial Withdrawal Charge
The amount after deduction of applicable charges called “Residual Amount” is finally invested in the fund chosen by the policyholder.Also, the current investment value of the funds invested is readily available to the policyholders in form of Net Asset Value (NAV), as this is declared regularly by an insurance company.
While in traditional plans, the policyholder is completely unaware about the class of assets in which funds are invested.
3) Nature :
Traditional life insurance plans are aimed primarily to encourage savings and have adequate protection or life cover for the policyholder. Traditional policies are considered risk-free, as they provide fixed returns in case of death or maturity of the term. ULIPs in addition to providing protection cover are seen as tool for wealth generation because of the options of investing the policyholder‘s funds in various fund types depending upon the investment strategy and risk appetite -, therefore provide opportunities of higher returns. However, one must note that unlike the traditional life insurance plans the ULIPs are subject to the investment risks associated with the capital markets.In addition,a ULIP investor has the flexibility to switch funds, determine the amount of investment and withdraw funds partially or systematically.
4) Decision Maker :
The choice of investments in ULIP lies with the policyholder/investor. Therefore, depending upon the risk appetite, an individual can choose either a traditional life insurance plan or a unit-linked life insurance plan. ULIP is the instrument of choice for an “Active Investor.”
For “Passive Investors,” whose priority is savings and security along with protection cover, a traditional life insurance policy may be better suited.
The age of an individual and number of dependents is also directly proportional to his/her risk taking ability. The risk appetite is higher for younger people considering the larger amount of time they have to remain invested to average out market fluctuation.
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