Notwithstanding the severe cascading effects of the pandemic on human lives and economy, there is one positive mindset change pertaining to insurance. People have realized the importance of insurance and that is a very positive shift. Life insurance, particularly has, become a necessity rather than an option. However, now the issue is to select the right kind of policy as insurers have been offering a large number of insurance products to customers and one needs to be cautious to select a policy that suits requirements well.
Particularly while selecting a life insurance policy, with a choice of between Endowment Plans and Unit Linked Insurance Plans (ULIPs), the focus needs to be on a policy that is a combo of protection and saving.
People need to consider some key aspects while going for a life insurance policy- Endowment (insurance plus saving) or ULIP (insurance plus investment).
These key aspects include protection, premium, maturity benefit, risk, returns, transparency, flexibility, tax benefits, and surrender time.
What Is Endowment Plan
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An endowment plan is a life insurance policy that provides both a maturity benefit and a life cover. The endowment plan’s savings component is represented by its maturity benefit. So, the policyholder can use an endowment plan to save money for the future. Insurers pay out the lump sum amount guaranteed as maturity benefits under the plan if the policyholder lives out the policy term.
Risk appetite is an important determining factor and those who do not believe in ‘Higher the Risk, Higher the Profit’ should opt for this as endowment plans do not carry any risk
What Is ULIP
ULIPs, on the other hand, take part in the market, and the returns are thus correlated with market performance. All life insurers have in-house investment managers that actively manage their unit-linked funds in accordance with the fund philosophy; these managers have the ability to provide superior long-term risk-adjusted returns.
Additionally, a consumer has the option to change funds, reroute premiums, and withdraw some of their gains.
Customers that choose to be comparatively more active and have advanced market knowledge ought to select ULIPS. However, depending upon market forces, these plans carry high risk for shorter (five years) but for a long period-10-15 years, risks are significantly reduced.
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COVERAGE
With ULIP, a policyholder, along with a life cover, gets an option to create wealth over the long term. ULIPs invest a portion of the premium, among other things, in equity funds, debt funds, or balanced funds.
“Endowment plans give policyholders their guaranteed maturity benefits when they reach maturity. Typically, these returns are fixed. Additionally, endowment schemes offer bonuses. The returns paid out upon maturity for ULIPs are based on the state of the markets. There are no precise guidelines for withdrawals and lock-in periods in endowment schemes. On the other hand, there is a 5-year lock-in term that is both explicit and required for ULIPs. Only after this time are withdrawals permitted,” Kavinder Khurana, MD, Bharat Claims, said.
Moderate levels of flexibility are provided by endowment plans. The policyholder has the authority to choose how the money is invested, Kavinder said.
“However, they can improve the coverage and the benefits owed thanks to the top-up capability. ULIPs provide increased adaptability. One can select from a variety of investment option in the markets,” he added.
TAX BENEFIT
“Despite significant variations in important areas, both have one thing in common: they both provide tax savings advantages. Under Sections 80C and 10(10D) of the Income Tax Act of 1961, both ULIPs and endowment plans provide tax advantages. The death benefits and maturity benefits are also exempt from tax under section 10(10D),” Kavinder said.
Before purchasing a life insurance policy, it is always preferable to determine the needs and suitability, he suggested.
