Key Differences Between Ulips and Traditional Plans

Published by Sharekhan Education | April 10, 2021

Key Differences Between Ulips and Traditional Plans

In your quest to provide financial security to your loved ones you need to have a good risk management strategy in place and what better than life insurance? Life insurance is that important risk management tool that can offer financial security to your loved ones in your absence.

Of the various types of policies available to choose from let us discuss here the key differences between new age market linked policies i.e. ULIPs,and the traditional policies i.e. Endowment, Money back & Whole life plans. These policies differ from each other in terms of their investment approach, choice of funds, transparency of costs, risk and returns, partial withdrawals, death and maturity benefits as follows:

Investment Approach:

Traditional plans invest in conservative instruments as prescribed by IRDAI while ULIPs invest in the capital markets and are managed by expert fund managers. ULIPs in fact function like mutual funds and provide dual benefits of insurance with investments.

Choice of funds:

ULIPs offer a unique feature. Being market-linked, these plans provide a selection of funds to choose from, such as equity fund, debt fund, hybrid fund, money market fund, etc. Depending on your risk profile you can invest in the fund of your choice and also shift between them using the switch option. On the other hand traditional policies invest the premium according to investment guidelines set by IRDAI; here the insured cannot opt for any investments of choice.

Transparency of costs:

Though the insured has to pay costs associated with both types of plans i.e. traditional plans and ULIPs the major difference is in the transparency of costs. Traditional policies typically do not list out the various charges that the insured has to pay. The insured does not know how much of the premium goes towards charges and how much is invested. While ULIPs clearly outline payable charges such as mortality, fund management, and premium allocation fees. This feature enables insured individuals to track deductions from premiums and the actual invested amount.

Investment Risk versus Returns:

Partial withdrawals:

The option of partial withdrawals is available in ULIPsafter completion of a lock in period of 5 years. This option is not available in Traditional plans. Though in emergencies, these policies enable you to take loans against cash value, use it as collateral, or surrender them for funds.

Death Benefit:

In traditional plans, nominees receive the sum assured plus any bonuses in the event of the policyholder’s demise. However, in ULIPs, nominees receive the higher of sum assured or fund value as death benefit.

Maturity Benefit:

Traditional policies on maturity pay the insured the sum assured opted for and bonuses or loyalty additions if any. In money-back policies, only the remaining sum assured along with any bonuses is paid due to periodic money-back payments. While ULIPs pay the fund value by redeeming the available units at prevailing market price.

To wrap it up, consider these differences to choose the right policy for your family’s financial security.

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