ULIPs versus Endowment Plans

You are sure about your risk appetite. You know your investment tenure. Then, a ULIP can be a good option to invest in for the long-term.

ULIPs versus Endowment Plans

Much hard work goes into earning money and securing a better life for yourself. Different people have different needs from their money. But, the common goal is to lead a better future. For this, only savings based on calculations would not be enough.

Consider this simple example. You have saved your money in a bank account. This yields about 4% per p.a. Inflation in the country is 6% – 7 % p.a. At the same time. This means you would lose out on money then add more to your corpus.

The obvious option is to look out for investment tools to help grow your money. Wouldn’t it be great if you put your money to do an equal amount of hard work you put into? With reduced interest rates in bank-based products, save havens like Fixed Deposits are not a good option they used to be. There are several insurance products which fit into this situation.

What is a ULIP?

Unit Linked Insurance Plans (ULIPs) links your investment to the capital market. It gives you the best of both worlds, that is, insurance and investment. Your money buys you investment options like stocks and bonds, ensuring life cover as well. One of the best advantages of ULIPs is the amount of customisation and flexibility allowed to customers.

Each one of us has an inherent risk-absorbing capacity. Thus, it is unfair to sell the same product to everyone. ULIPs allow you to choose the risk factor. Thus, customise the product as per your needs. The equity market is being referred to as the risk factor here. It is a tool that allows your money to grow faster. This is faster than traditional insurance products, giving you insurance-based benefits.

Any Better Than Endowment?

Endowment plans are one of the safest investment options available. But, if you want your money to grow faster, adding some flavours of the equity market will boost this up. ULIPs allow selecting equity exposure from 0% to 100%, depending on your goals and appetite. If you one looking for long-term investments, a ULIP will provide better returns.

Unlike endowment plans, which have a rigid structure, a ULIP allows you to change the plan as per your need. If someone does not want to expose their money to equity, they can opt for 100% equity. The three categories of ULIPs include Aggressive, Balanced and Conservative. With Aggressive, your exposure to equity is up to 100%, whereas for balanced they are 60%. Conservative invests all your money into debt instruments.

You can also add top-ups to your policy. There is much more flexibility around termination or resuming of the plan when compared to endowment plans.

Lack of transparency is one reason that keeps some people away from insurance products. But, regulatory changes to ULIPs changed that. One has access to their portfolios. Thus, you can manage and see where their money is. Regular disclosure by insurance companies about their plans adds to the transparency factor.

Another significant advantage over Endowment plans is the liquidity aspect. We never know when we need money. Liquidity after the initial years ensures you can withdraw your money as per your convenience without having to pay any charges.

Things to Keep in Mind

Even though ULIPs have many advantages over their traditional counterparts, it is not a win-win situation for everyone. Any link to capital market means creeping in of risk factors. You must understand and figure out their investment goals along with the willingness to take risks. Tenure is another important factor. When you are looking at a longer term of 10 to 15 years or even beyond, ULIPs will yield much better results that some prominent investment tools.

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