As per a 2021 report by Forbes, only 37% of the citizens in India have insurance which amounts to around 514 million people. However, about 400 million people in India have no access to or awareness about health insurance. When it comes to selecting insurance, there are numerous options available and it can be a daunting task for you to select the right one.
In this blog article, we will understand the difference between ULIPs and endowment life insurance plans.
What are ULIPs?
Unit Linked Insurance Plans (ULIPs) are a combination where insurance and investment are combined. The policyholder has to pay a premium amount for their ULIP policy and the premium is divided into life insurance and funds which can be equity or bond funds.
Similar to a mutual fund, ULIPs are managed by fund managers. ULIPs are flexible and you can select between equities, debts or hybrid mutual funds. The lock-in period of ULIP can be 3-5 years, depending on the plan and during the tenure of the ULIP, the policyholder can switch between the funds. And when the policy matures, you get a maturity benefit that you can use to fulfill your financial goals. In case of unfortunate events, the nominees of the policy receive the death benefit.
What are Endowment Plans?
The endowment plan offers the dual benefit of life insurance and investment. When you invest in an endowment plan, you get a life insurance cover and can save money for retirement or to fulfill any other financial goals. The policyholder’s family or nominee gets the sum assured in case of an unfortunate event. You also get a tax exemption under sections 80C and 10D of the Income Tax Act and you can also get a loan against the policy in case of a financial emergency.
Difference between ULIP and Endowment Plan
Investment type: ULIP and endowment plan, both provide insurance coverage but apart from it, an endowment plan encourages the policyholders to increase their savings. On the other hand, a ULIP offers a combination of life insurance and investment of your choice in equity, debts or hybrid funds.
- Lock-in Period: In ULIP, the lock-in period can vary from 3-5 years, based on the plan. On the other hand, the lock-in period for the endowment plan varies from 2-3 years.
- Flexibility: ULIP offers you the flexibility to select from different investment types such as equity, debt or hybrid funds. But an endowment plan does not offer such flexibility and the investment decision is made by the insurer by default.
- Transparency: ULIPs are more transparent as compared to endowment plans because the policyholder himself selects the type of investment. In an endowment plan, typically the investors do not have any track of the investment as it is handled by the insurer.
- Returns: The endowment plan provides a fixed amount of return when it matures or as a death benefit in case of an unfortunate event. While in ULIP, the returns are dependent on the market’s performance.
- Switching of Funds: One of the main differences between an endowment plan and ULIP is that policyholders do not have major control over the investment as it is done by the insurer. On the other hand, in ULIP, the policyholder can switch between the funds anytime they want.
The Bottom Line
Both the endowment plan and ULIP offer the dual benefit of life insurance coverage and investment benefits. However, both serve different purposes and you can select from them based on your needs and financial goals. If you like to be a bit aggressive, going for ULIP can be an ideal option as it is more flexible and you can switch between the funds whenever required. However, if you are looking for a life insurance cover and want to save money, an endowment plan might work best for you. You can also use a life insurance calculator to find out suitable insurance for you.
Frequently Asked Questions (FAQs)
What is a non-ULIP policy?
Every traditional endowment life insurance policy is known as a non-ULIP policy.
When should I invest in an endowment plan?
There is no specific age to invest in an endowment plan, the earlier you start investing, the better returns you would get in the long term.
What are the disadvantages of ULIP?
To invest in ULIP, you need to invest a bigger amount comparatively and there is a lock-in period of 3-5 years in ULIP. Moreover, it is market-linked hence there are more fluctuations in the invested amount.
What happens if I discontinue my ULIP before the lock-in period ends?
If you discontinue your ULIP before the lock-in period ends, you will not receive the entire invested amount and you will receive only the fund value.
What are some of the disadvantages of an endowment plan?
One of the major disadvantages of an endowment plan is its low rate of returns. Though this plan gives you a guaranteed sum when it matures, the return on investment is comparatively lower than other investment options available.