Before acquiring any insurance plan, one must evaluate aspects such as the sum assured, premiums, policy tenure, risk, and so on. However, before making a decision, you should grasp the differences between the two policies you are buying. ULIP is one of the investment plans getting very famous for its dual benefits and endowment plans.
Difference between ULIP and endowment plans
The primary distinctions between ULIPs and endowment plans are listed below:
Type:
One of the primary distinctions between ULIPs and endowment plans is how the premiums payable are invested or saved. Aside from life insurance coverage, an endowment plan assists the policyholder in increasing his savings. At the same time, the ULIP offers life insurance coverage as well as investing opportunities in a variety of capital markets, including equities, debt, and a combination of the two which makes it one of the best investment plans in the market.
Lock-in period:
The difference between ULIPs and endowment plans can also be measured using their lock-in periods. The endowment plan’s minimum and maximum periods are totally determined by the payment term and plan chosen by the policyholder. However, the typical lock-in duration ranges from two to three years. There is no stated maximum period for ULIPs. ULIPs have a five-year lock-in duration. Before 2010, the minimum lock-in duration for ULIPs was three years. Later in 2010, the governing authority (IRDAI) approved a change, extending the lock-in term to five years.
Flexibility in selecting the investment type:
The key distinction between ULIPs and endowment plans is that ULIPs allow the policyholder to select the investment type (equity, debt, or balance) and this is also one of the reasons why it is one of the investment plans that is preferred by customers. However, the standard endowment plan does not provide this function. Under ULIPs, the policyholder is responsible for selecting the type of investment plan, but in endowment plans, the insurer handles all investment operations.
Transparency:
The difference between ULIPs and endowment plans can also be quantified in terms of transparency. When it comes to transparency, the ideal investment plans discloses performance, returns, and premiums. Unfortunately, not all endowment plans allow the investor to maintain track of his investments. However, with a Unit Linked Insurance Plan, the policyholder is solely liable for the returns on their investment. However, with an endowment fund, all investment-related activities are managed by an insurer; as a result, the policyholder has little insight into his portfolio or the profitability of his investment. This is one of the most significant factors to consider when comparing the ULIP and endowment plans.
Switching funds:
The distinction between ULIPs and endowment plans shows that the policyholder of an endowment plan has limited or insignificant control. S/he cannot adjust their investments. At the same time, ULIP policyholders have power over fund selection and switching. They can swap between funds in their ULIP at any time and that makes it one of the investment plans customers prefer investing in. However, a policyholder in an endowment plan has no ability to switch to other funds. As a result, the contrast between ULIP and endowment plans suggests that investors should choose ULIP if the policyholder needs to move funds.
Returns:
ULIP and endowment plans differ in terms of expected returns. The policyholder receives the guaranteed set amount at maturity or as a death benefit in the case of an endowment plan. However, in the case of ULIP, the returns are explicitly linked to market performance. As a result, if the funds are invested in the right kind of United Linked Insurance Plan, the returns on ULIPs may be higher than on endowment plans.
Choosing the Right Fit:
The decision between ULIPs and endowment plans ultimately comes down to personal financial goals, risk tolerance, and investing choices. ULIPs are ideal for investors looking for dynamic, market-linked returns and asset allocation flexibility. Endowment plans, on the other hand, provide a more conservative, guaranteed return approach characterized by disciplined savings and limited flexibility. The decision between the two is based on a thorough assessment of individual needs and a clear understanding of how each fits into the overall financial strategy.
ULIPs vs. endowment plans: What happens at maturity?
When an endowment plan matures, the policyholder receives the guaranteed maturity benefits. These returns are often fixed, so you know exactly how much you’ll get when the policy matures. In addition to these guaranteed benefits, endowment plans may pay out bonuses.
In the case of ULIPs, the returns paid at maturity are determined by market performance. The units you invested in will be redeemed at the market price at the time they mature. As a result, these returns are impossible to predict.
To further grasp this, let’s start with a simple example. Assume you purchased a Unit Linked Insurance Plan some 20 years ago. At that point, you had invested in equities funds. 20 years later, suppose you have 10,000 units in your portfolio and the current market price is Rs. 15 per unit. Your total returns at maturity will be Rs. 1,50,000 (Rs. 15 x 10,000 units).
Conclusion
As previously said, there are several factors to consider when comparing ULIPs and endowment plans. The differences between ULIPs and endowment plans can be used to make the right purchasing decision. Both of these plans have various advantages and disadvantages. The investor might choose between a ULIP and an endowment plan based on their financial needs and ambitions. You can also choose a ULIP if you have a higher risk tolerance and want to maximize your investment returns. Alternatively, if you want safer and guaranteed returns on your investments, consider an endowment plan. Thus, before making a purchase decision, it is critical to compare ULIPs and endowment plans.
