ULIP is a type of insurance plan that gives investors the choice of both insurance and investments in a single policy. Traditional insurance plans, on the other hand, are ideal for people who solely seek a life cover, and possibly, some form of maturity benefits. Traditional life plans may offer benefits like low-risk levels, fixed maturity returns, and tax benefits.
Those who chose traditional insurance plans tend to do so mostly because they consider it to be a safer choice. This is one of the low-risk ways to create a corpus for your family’s future.
ULIP and Traditional Insurance Plans comparison
Traditional insurance plans are known to be low-risk, but the maturity returns they offer may not be as lucrative as offered by investment plans. ULIPs, on the other hand, offer returns through investments.
Here are some differences and similarities between ULIP plans and traditional insurance plans.
| Parameters | ULIP | Traditional Insurance Plans |
| Purpose | Benefits of both life insurance and investing. | Insurance cover |
| Objective | Insurance and investment benefits in long-term plans | To get benefits of life cover, and maturity benefits, if any |
| Regulatory body | IRDAI | IRDAI |
| Return on investment | ULIP returns are variable as they are market-linked | Not all life insurance plans offer maturity benefits. The primary benefit offered is death benefit. |
| When should you consider it? | Consider ULIP if you want protection for your family as well as create a corpus for your future | Consider a traditional insurance plan when you want protection against mishaps and low-risk maturity benefits |
| How is your money utilised? | The premium payment towards ULIP goes towards the life cover sum assured as well as market-linked investments | The premium is entirely directed towards the sum assured. |
| Flexibility | This plan is flexible. The policyholder can decide whether they want to invest in equity, or debt, or hybrid funds. | There is no flexibility since there is no investment side to the plan. |
| Tax benefits | Available under Section 80C. | Available under Section 80C. |
| Expense | Expenses include mortality charges, premium allocation charge, fund management charge, and administration charges. | There are rarely any specific charges that the policyholder requires to pay. |
| Investment portfolio | The investment portfolio is unknown. 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 | There is no specific lock-in period. Plans are maintained till maturity. However, they can be surrendered while they are in force. |
| Security | Maturity returns are market-linked. Thus, returns are not pre-determined. | Plans are comparatively low-risk, and thus, relatively more secure. |
| Switching options | Allows you to switch between the funds linked to the plan. You will also be able to change the risk-return. | Plans are not market-linked. Hence, no switching options. |
| Ideal-term | Long term | Long term |
ULIPs are known to be a way to invest, but several people who buy them do so because they need insurance or want to save money on taxes or build up their capital. ULIPs have a minimum lock-in period of 3 to 5 years. On the other hand, there is no defined lock-in period for traditional insurance plans.
When you only seek protection for your loved ones against an uncertain future, you can opt for a traditional life insurance plan. But with ULIPs, you can get insurance as well as grow your money through market-linked investments at the same time. Using a ULIP plan calculator will help you understand and figure out the ULIP plan tailored to your needs.
To purchase a ULIP plan you should know about ULIP NAV. Here is the formula used to figure out the ULIP NAV:
NAV = (Market value of investments held + Value of current assets) – (Current liabilities & provisions value) / Total number of outstanding units as of the date.
For ULIPs, the money from several investors is put together to make one large investment sum. Then, this money is put into different market instruments. So that the company can give the right amount of money back to each investor, the fund manager breaks up the total amount of money invested into small units with a certain face value. Knowing the NAV can help you better understand your ULIP.