Feb 21, 2009

ULIPs vs Traditional Insurance Plans - A Comparison

I’ve already discussed at length why you should avoid buying life insurance for investment or tax saving purposes. Anyway, if you want to invest in insurance, Ulips are no doubt better than traditional life insurance plans such as money back, endowment and whole life policies due to a host of reasons. This post makes a comparison between Ulips and traditional insurance plans based on various parameters.

Ulips vs. Traditional life insurance plans

1. Potential for better returns: Under IRDA guidelines, traditional plans have to invest at least 85% in debt instruments which results in low returns. On the other hand, Ulips invest in market linked instruments with varying debt and equity proportions and if you wish you can even choose 100% equity option.

2. Greater transparency: Unlike Ulips, in a traditional life insurance policy you’re not aware of how your money is invested, where it is invested and what is the value of your investment.

3. Flexibility in investment: The top most advantage which Ulips offer over traditional plans is the flexibility offered to you to customise the product according to your needs:



a. Flexibility to invest the money the way you want: Unlike traditional plans, Ulips allow you full discretion to choose the fund option most appropriate to your risk appetite.

b. Flexibility to change the fund allocation: Ulips also give you the option to change the fund allocation at a later stage through fund switching facility.

c. Flexibility to invest more via top-Ups: Unlike traditional plans where you’ve to invest a ‘FIXED’ premium every year, Ulips allow you flexibility to invest more than the regular premium via top-ups which are additional investments over and above the regular premium. To understand the significance and mystery of top-ups, please read “5 ULIP Secrets”.

For the purpose of tax deduction under section 80C, there’s no difference between regular premium and top-ups. In other words, top-ups are also allowed deduction under section 80C.

d. Flexibility to skip premium: In case of traditional plans, you’ve to pay premium for the entire duration of the plan. And if by chance you skip even a single remium, your policy lapses. Whereas Ulips allow you the flexibility to stop paying premium usually after three policy years. Your life cover continues by deducting the mortality charges from the existing investment corpus.

4. Flexibility in insurance coverage:



a. Option to choose coverage: While in case of traditional insurance plans, the premium is calculated based on sum assured, for Ulips premium payment is the key component based on which you can decide about the insurance coverage. Put simply, on the basis of premium, Ulips allow you to opt for any amount of sum assured within the specified range of minimum and maximum life coverage.

b. Option to increase risk cover: Unlike traditional plans where you’ve to buy a new policy each time you want to increase your risk cover, Ulips allow you to increase your insurance cover anytime.

5. Higher Liquidity (Better exit options): the possibility to withdraw your money before maturity (through surrender or partial withdrawals) is higher in case of Ulips as compared to traditional plans and also the exit costs are lower. For details, please read “How to surrender Life Insurance”.

Ulips are different and of course better than traditional insurance products; however, while in traditional plans your role is a passive one restricted to just making premium payments, Ulips require your active involvement. You’ve to make a lot of decisions such as deciding about sum assured and premium to be paid, choosing between type I or type II Ulip, making a choice among various fund options available and also deciding about fund switching from time to time based on your needs, risk appetite and market outlook.

Finally, before investing in Ulips, know the best Ulips available in the market.

Also see:
1. SBI Life-SMART ULIP: An Analysis
2. Life Insurance: Most Amazing Fact
3. ULIP Charges Capped by IRDA: A Review


3 comments:

  1. Its Great to have the advantages of the ULIPs at last. In fact people of scared of the ULIP pplicy agents as they do not know how to present the case

    Sudakar J

    ReplyDelete
  2. simply superb explanation........

    ReplyDelete
  3. good article, like it...

    ReplyDelete

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