ULIPs vs Traditional Life Insurance Plans: Which one to choose?

February 28, 2020
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Craig Fischer
Posted in Finance
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The insurance sector in India might have penetrated at large today. According to a report, the overall penetration of insurance is 3.7% in the current fiscal year in India. Due to the growth of the insurance sector, there has been multiple introduction of products in the market. However, the insurance industry can be broadly categorised into traditional life insurance policies and non-traditional insurance plans. Although there are diverse policies to choose from, many of you might turn towards a ULIP plan from the non-traditional category and a traditional life plan as a whole.

Before you make a selection between the two, let’s first understand what a ULIP plan is in detail:

A ULIP plan can be a unique financial product, which can combine the benefits of the following under a single integrated plan:

Life Insurance

Under ULIP insurance, you can safeguard the future of your loved ones in your absence. After your demise, a ULIP plan can provide a monetary pay-out called death benefit. Since a ULIP policy can provide a life cover, you should regularly pay the premium in return for the coverage.

Investment

A ULIP policy can be a long-term investment. Since it has a lock-in period of five years, you can build a substantial corpus for a secure future. If you want to accumulate wealth, you should invest in a ULIP policy at a young age. Since you have enough time in your hands, you can generate a larger corpus by the time you retire.

Now that you have understood the dual-benefits of a ULIP policy, let’s proceed further to learn what a traditional life insurance is in detail:

Traditional life insurance can be pure protection plans with the primary aim of family security. The primary idea of the formulation of traditional life insurance can be to provide death pay-out to your loved ones when you are not around for them. Under traditional life insurance, you can find the following types:

Term insurance

As the name suggests, term insurance can offer a financial coverage for a specific duration.

Whole life policy

A whole life policy can cover your beneficiaries for a long duration until the age of 99-100 years.

Endowment plan

An endowment plan is a combination of savings and insurance.

A ULIP plan and traditional life insurance are two broad concepts of the life insurance sector in India. Since both these plans can hold importance in your life, you should understand which policy is appropriate for you. Therefore, you should begin by first knowing the difference between a ULIP policy and traditional life insurance. Let’s go through the following distinctions between both these policies in detail:

Unit Linked Insurance Plan (ULIP)	Traditional Life Insurance
The primary objective of a ULIP plan can be to offer financial protection to your family as well as ensure your active participation in the capital markets	The primary object of traditional life insurance can be to provide coverage against unfortunate events such as death, physical disability, critical illness, and so forth.
The ULIP returns can depend on the market performance, risk appetite, and the selected fund	Returns are fixed
As a policyholder, you can choose the type of funds and premium payment mode based on your preference	As a policyholder, you might not receive flexibility since it does not contain an investment factor
The ULIP tax benefits can allow you to reduce your tax liability in accordance with Section 80C and Section 10(10D) of Income Tax Act, 1961	Under traditional life insurance, you can save your taxes according to the guidelines of Section 80C of the Income Tax Act, 1961

Although the key differences between a ULIP plan and traditional life insurance can be clear, you might be unable to understand which policy can be suitable for you. As a policyholder, you should purchase an insurance policy based on your needs. Before you buy either of the two policies, let’s understand which policy is better for you:

A ULIP plan can be suitable for you if you are looking forward to investing rigorously as well meeting the life goals of your loved ones. Since a ULIP policy is a mix of investment and insurance, your insurance as well as investment needs can be taken care of effortlessly under a ULIP plan. Although a ULIP policy is a market-linked product, you can diversify your investment portfolio as well as protect your invested capital from market volatility.

On the other hand, traditional life insurance has been a part of the insurance market for a long time. The protection benefits under a traditional life policy can allow you to secure your family as well as leave behind a legacy for them.

In a nutshell, the ideologies behind a ULIP policy and traditional life insurance can be different from one other. Although both these policies can provide you with many benefits, you should evaluate your financial needs and investment goals before you choose between the two. Moreover, select a reputable insurance company that can provide you maximum coverage at an affordable rate.