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ULIP vs Traditional Plans

DIFFERENCE BETWEEN 
ULIP AND TRADITIONAL PLANS

 

 

Mahesh was grappling with a strange situation. He wanted to invest in an insurance product to take care of his risk as well as investment requirements, but he was not able to decide between “ULIP” or a Traditional insurance product (e.g. endowment plan) Fortunately he had ready help handy – his financial advisor – Ram.

Ram explained that both the types of insurance products have their own interesting nuances and, he went about explaining them as given below. 

ULIP vs. Traditional Plan:

Definition:
ULIP means a “Unit Linked Insurance Plan.” It combines the characteristics of a mutual fund and life insurance product. Part of the premium goes into buying life insurance cover while the remaining part of the premium is invested in an asset class (Equity/Debt), based on one’s choice. Asset class investment is made after deduction of known charges.

Traditional Plan – Money Back Plan/Endowment Plan/ Term Plans. Before the advent of ULIP’s, these were the instruments of choice, for Insurance and Investment. However, they offered no option to choose between various asset classes and the investments were made solely at the discretion of the insurance company. Traditional plans provided returns in the form of sum insured plus bonus (if and when declared). The amount of bonus depends upon profits made by the insurance company and the declaration of the bonus at the sole discretion of the life insurance company.

Since traditional plans offer assured returns, a major portion of the premium is required to be invested in risk-free securities, as per Insurance Regulatory and Development Authority (IRDA) mandate. 

Investments:

In ULIP, at the time of buying a life insurance plan, the policyholder has the option of choosing the type of fund depending upon the asset class (equity/debt) and the investment strategy of the policyholder. 

 

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 in primarily in Government Securities and Corporate Bonds.

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. 

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.

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.

For any consultation or placing a request for investments in any ULIP or Traditional Plans, contact us at info@taxorigin.com