Which is better, ULIP or Traditional Insurance Plans?

ULIP is an insurance product that offers investors the option of both insurance and investment under a single integrated plan. The policyholder can also make use of the top-up facilities, switching between funds, reduce or increase the level of protection, additional riders and option to surrender.

Traditional insurance plans provide benefits like risk cover, fixed income return, safety and tax benefit. These are the oldest type of plans that cater to those who have low risk appetite. Traditional insurance plans are being opted as it is a stable option. This is a risk free investment. The major chunks of the investible funds are in debt instruments. Death benefit offered is sum assured along with guaranteed and vested bonus. This helps you in asset creation for a long tenure. The premiums are fixed. Withdrawals won’t be allowed before maturity.

Comparison between ULIP vs. Traditional Insurance Plans

Traditional insurance plans protect your capital but the long term return is poor. The markets will fare better in time and yield more with equity based investments. Following is a comparison between ULIP and Mutual Fund:

Parameters ULIP Traditional Insurance Plans
Purpose Insurance cover along with investment benefits. Insurance cover
Objective Long term plans that offer insurance and investment benefit. To avail fixed returns in a long term.
Regulatory body IRDA IRDA
Return on investment The return is variable as it is linked to Equity. ULIP has low return. The return is guaranteed as the investment in risk instruments are low. You will get fixed returns.
When should you consider Consider ULIP if you want protection and more than nominal returns in a long term. You must consider a Traditional insurance plan when you want protection against mishaps and nominal returns in a long term.
How you money is utilised The premium payment towards ULIP go towards meeting the expenses, insurance cover and equity mutual fund. The premium payment towards Traditional insurance plan goes towards expenses, insurance cover and low risk instruments.
Flexibility There is flexibility in this plan. You can decide what proportion of the amount that you are investing is to be used for insurance cover and what proportion should go towards the investment in equity. No flexibility.
Tax benefit Available under Section 80C. Available under Section 80C.
Expense The expenses to manage ULIP are high as there is no limit set by IRDA. Expenses include mortality charges for life, insurance premium allocation charge, fund management charge and admin charges. The expenses are high to manage Traditional insurance plans. There is no upper limit set by IRDA. The expenses include mortality charges for the life insurance and premium allocation charge.
Investment portfolio The investment portfolio is unknown. The portfolio tracking can be possible if the insurance company is declaring its holdings. No transparency and the investment portfolio remains unknown.
Lock in period Minimum 3 – 5 years The Traditional insurance plan is locked in till its maturity.
Security No security Highly secured.
SIP Yes Not available.
Switching options Allows you to switch between the funds linked to the plan. You will also be able to change the risk return. Not available.
Ideal term Long term Long term

ULIPs are being sold as investment vehicles, but it is mainly for those who need insurance and to those who wish to save tax or increase their capital. ULIPs have a minimum lock in period of 3 – 5 years whereas the Traditional insurance plan will be locked in till its maturity. Traditional insurance plan must be taken when you want to insure only. But with ULIP you can get the insurance and can also increase your capital.

GST of 18% is applicable on life insurance effective from the 1st of July, 2017

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