When you want to get a dual benefit of insurance & investment, there are two options available in the market. The two plans available are the unit linked insurance plan and endowment plan, though both provide the option of savings with life coverage, but also differ in terms of risk, returns, & flexibility.
What is ULIP?
ULIP offers a dual benefit of insurance & investments, where a part of the premium is allocated towards life insurance & the remaining part is invested in market-linked securities. In case of a sudden demise of the policyholder, the beneficiaries will receive the death benefit or the fund value, whichever is higher. In case the policyholder survives the policy, the policyholder will receive the fund value that would have been accumulated, depending on the fund’s performance.
What is an Endowment Plan?
Endowment Plan offers dual benefits of insurance & investment. Under this plan, a policyholder is required to save a certain amount regularly up to a certain period to get a lump sum amount at the time of maturity in case they survive. Some part of the premium amount is diverted towards life coverage, & the remaining part is accumulated as savings.
Types of ULIP Plans
Provided are the types of ULIP Plans available in India:
- Cash Funds
Investments done in the money market that are owned by a bank are called cash funds, bearing a very low level of risk, hence the lowest returns.
- Equity Funds
These plans are basically long-term investments that come with high-risk tolerance. If an individual is looking for long-term investments with a good risk tolerance level, go for equity funds.
- Balanced Funds
To balance risk &return, ULIP offers balanced funds where an individual can maintain a balance between debt &equity.
- Debt Funds
These plans are meant for conservative investors who want to get gradual returns with low risk. Such investments include debts, government securities, bonds, &other debt instruments.
- Sector-Specific Funds
Under this plan, individuals can invest by focusing on certain specified sectors of the industry, like healthcare, technology, or energy.
- Money Market Funds
Money market funds can help investors invest in short-term fixed-income financial instruments to preserve capital &liquidity. Investors seeking low-risk, short-term investments can use money market funds.
- Child ULIPs
These plans are designed to fulfil the children’s financial needs, such as education or marriage. It offers parents life coverage & investment options that are well-aligned with their children’s goals.
- Retirement ULIPs
These plans help create retirement funds, helping a policyholder secure their retirement tenure along with earning returns. It combines investment &insurance, having a long lock-in period, where systematic withdrawals can be made.
Types of Endowment Plans
Provided are the different types of Endowment Plans:
- Unit-Linked Endowment Plans
This plan provides a combined benefit of insurance & investment in equity & debt funds. The return on investments is directly linked to the market, i.e. the more risk, the higher the returns.
- Traditional Endowment Plans
These plans are the basic & simplest version of endowment plans, offering a guaranteed sum in addition to accrued bonuses, if any. They have low risk & stabilised returns, hence suitable for conservative investors.
- With Profit
“With profit” plans offer bonuses depending on the insurer’s performance, i.e. it offers life insurance coverage & profit share. This leads to wealth creation along with financial security.
- Money Back Endowment Policy
This plan offers liquidity throughout the policy tenure by providing a regular payout periodically. Hence, it helps meet the different life stage requirements, & the maturity amount is also secured.
- Without Profit Plans
These plans do not contribute to the profits of insurance companies, i.e., they include only a fixed amount of sum assured. These plans will suit risk-averse individuals well, offering them stability & guaranteed returns.
- Full Endowment & Low-Cost Endowment Plans
The full endowment plans offer a sum assured equal to or more than the death benefit at the time of maturity. Whereas the “low-cost endowments plan” offers lower premiums & is used to repay the mortgage amount.
Differences between ULIPs & Endowment Plans
Provided are the differences between ULIP & Endowment Plans:
| Point of Difference | Ulip’s | Endowment Plans |
| Flexibility in Investment | This plan allows for switching between the funds depending on the risk appetite & market conditions, hence providing flexibility. | This plan offers limited flexibility on the basis of benefits & a fixed amount of premiums. |
| Market-Linked Returns | As these plans are market-linked, they offer higher returns. | Under this plan, the returns are guaranteed, hence protecting from market volatility. |
| Investment Component | This plan helps invest in different funds, such as debt, equity, or balanced funds. | Due to guaranteed returns, this plan helps build a savings corpus. |
| Tax Benefits | The amount of premium paid is available for deduction of tax u/s 80C. Also, the maturity benefits are exempt from tax u/s 10(10D). | The amount of premium paid is available for deduction of tax u/s 80C. Also, the maturity benefits are exempt from tax u/s 10(10D). |
| Insurance Coverage | This plan provides dual benefits of life insurance & investment benefits. | This plan only covers life protection. |
| Legacy Planning | This plan may provide for legacy planning via growth in investments. | This plan offers legacy planning via guaranteed payouts & death benefits. |
| Liquidity Options | It offers liquidity due to options such as the surrender option & partial withdrawal. | Limited liquidity, as it charges a penalty in case of early withdrawal or surrender of the plan. |
| Long-term Wealth Creation | This plan offers the creation of wealth in the long term. | This plan helps build funds over a period of time by focusing on predictable & steady savings. |
Conclusion
Deciding between a ULIP &an endowment plan depends on the financial objectives, investment horizon, & risk tolerance level. In case of risk-averse individuals, looking for safe & guaranteed returns, irrespective of the market conditions, you should opt for endowment plans. On the contrary, if you are willing to take some risk to reap higher returns, ULIP can be a better option.Hence, both plans can be excellent options for retirement planning purposes after taking into consideration the retirement objectives & risk tolerance level.