Today, a lot of life insurance companies are coming up with multiple types of plans that provide added benefits such as maturity payout, investment avenues, and other offerings. Some offer pure life cover, others offer guaranteed or market-linked returns at the end of the policy term. The two most popular types of life insurance plans that offers returns at the end of the policy’s life cycle are Unit-Linked Insurance Plans (ULIPs) and endowment plans. They are often compared and due to their similar sounding benefits, investors are often confused, about which policy is right for them.
Here, we attempt to distinguish these policies based on various factors to help you choose the more suitable type of policy.
What is ULIP?
ULIP is a kind of life insurance policy that allows the policyholder an additional facility of wealth creation. When you pay your yearly, monthly, bi-annually or one-time premium, insurer uses a portion of your premium to cover various applicable costs and invests the rest of your money in equity or debt-based funds. This is a long-term investment option that allows you to generate market-linked returns (similar to a mutual fund or ELSS) and can help you meet your life goals. Now that you have an idea about what is ULIP plan, let us look at endowment plans.
What is an endowment plan?
An endowment life insurance plan provides a life insurance cover with the savings option. It is a long-term life insurance policy that generates you guaranteed income over the course of the policy term. The insurer pays a lump sum when the policy matures. If an unfortunate incident results in the policyholder’s death during the period of the policy, the insurer pays the death benefit (also known as the sum assured) to his or her nominees.
Which one should you go with?
You need to consider various factors before investing in either. These include:
- Returns
ULIP performance is linked to the financial markets. When you buy ULIPs, the insurance provider uses a part of the money to invest in different market-based instruments like bonds and shares. Hence, the ULIP plans returns are dependent on the market’s performance. This can potentially result in high returns, but it also makes ULIPs a slightly riskier investment. On the other hand, endowment life insurance policies offer a guaranteed payout, which is almost always lower than ULIPs.
- Maturity benefits
Under ULIP plans, you can choose among different kinds of funds to invest your money in depending on your risk appetite and requirements. In time, these funds accumulate wealth. ULIP funds are made of units, which are the assets you own under your policy. When the policy matures, the insurance company determines your fund’s worth by calculating the value of the aforementioned units. You receive the ULIP’s fund value as your maturity payout. In the case of endowment plans, the insurer pays you a sum assured with small bonuses when the policy matures.
- Withdrawal
ULIPs have a five-year lock-in period. During this time, you cannot withdraw any funds even if you want to surrender your ULIP. If you are wondering ‘‘why should I invest in ULIP,’’ the answer is its long-term benefits. The lock-in duration gives your investment enough time to grow. At the end of five years, you are eligible to make partial withdrawals from the ULIP fund. When it comes to endowment plans, you must pay the premium timely for a minimum of three years for the policy to accumulate a surrender value. After the initial three years, you can surrender your endowment life insurance policy to get the payout. The terms and conditions of surrender value may vary depending on the life insurance company you have chosen to invest in.
- Tax benefits
Good ULIP performance can lead to high returns, however that is not the only thing about ULIPs that attracts investors. It offers a yearly tax deduction of up to INR 1.5 lakh on the premium paid under Section 80C of the Income Tax Act, 1961. Like all types of life insurance plans, ULIP’s death benefit is also tax-free. These benefits are also available with endowment policies. However, these policies differ in terms of taxation when it comes to their maturity benefits.
The maturity pay-outs of endowment plans are tax-exempt. ULIPs offer this advantage only for the policies bought before February 1, 2021. If you purchase your ULIP after or on this date, you have to pay a 10% capital gains tax on the maturity value if your ULIP’s annual premium is over INR 2.5 lakh.
Now that you understand what ULIP is and how it is different from endowment policies, you can compare their plus points to determine which one is more appropriate for you.