Difference between an endowment plan and ULIP? How to choose between an endowment plan and a ULIP?

Difference between Endowment plan and ULIP?

Difference between Endowment plan and ULIP

The pandemic has had numerous negative impacts on us all. Many people lost their loved ones and suffered from financial issues. However, there is one silver lining here, and that is that people have realized the importance of having insurance. Needless to say, life insurance has become a need and cannot be treated as an option anymore. Insurance companies offer various attractive policies. However, you must have a basic knowledge of various insurance policies to understand their impacts on your life and then decide. 

People generally cast away every factor other than the assured sum, premium, and tenure while choosing a life insurance policy. Also, most people choose a policy relying on word of mouth from family, friends, colleagues, and various advertisements. Awareness is present among people, but one can still choose an unsuitable policy if not properly educated about the same. 

Related: Life insurance types simplified

Endowment plans and ULIPs are two very popular life insurance products. However, it is only normal to have a dilemma in choosing one between these two. One should always keep in mind some key aspects like maturity benefits, related risks, tax benefits, flexibility, tenure, etc. Let us first understand what an endowment plan and ULIP are.

Endowment Plans 

These are very popular since it provides twin benefits of life cover and maturity benefits. So the policyholder can save a lump sum for the future or his/her family members. Upon living out the policy term, he/she will get the guaranteed total amount and various maturity benefits. One can then use this amount after retirement, for children's education, to buy a car or house, and so on. However, if a policyholder doesn't live out the term, the whole amount and benefits will go to the nominee. 

ULIPs

Unit Linked Insurance Plans (ULIPs) provide you with insurance, tax-saving investment, and an opportunity for wealth generation. Some of the policyholder's premium money is invested in the market, while some go for risk cover. Here, you must understand that the returns depend upon the market performance. You get to choose how much to invest depending upon how much risk you are ready to take and also your investment horizon. The returns on ULIPs, although not guaranteed, could even be higher as it depends upon market performance. You can also switch funds without much inconvenience. 

Now that you know what an endowment plan and ULIP are let's consider the various factors before deciding on one insurance policy.

Related: Plus and minus of term life insurance plans and when you should buy it

Risks associated

Endowment plans do not carry any risk. Hence, if you want a risk-free policy, you should choose an endowment plan. You can also choose it if you do not care about switching funds and generating wealth through the insurance policy. 

Since ULIPs depend largely on market performance, the maturity amount can differ accordingly. If you have a huge risk appetite, you may choose a ULIP. However, if you have a very small risk appetite but want to focus on wealth generation, then you can choose to invest small amounts in a ULIP. You can also choose this if you have advanced market knowledge since the risk is high only for a short period, say about five years. After this lock-in period, the associated risk is reduced to a huge extent.

Coverage

In the case of a ULIP, as we already mentioned, a portion of the premium is invested in equity funds, debt funds, and so on. Thus, you get to create wealth over a long period, but you have a five-year lock-in term. It is also very flexible and allows you to tweak your investment strategy.

With endowment plans, on the other hand, you get a fixed return upon maturity besides any bonuses offered. There is also not any fixed lock-in term of guidelines for withdrawal. So you can withdraw money at any point in time without any fixed lock-in period.

Returns

According to experts, the average returns on ULIPs range from 10 to 12%. On the other hand, the average returns on the Endowment plans are close to the post-tax FD returns. 

Tax benefits

There are several differences when it comes to endowment plans and ULIPs. However, there is hardly any significant difference when we talk about tax advantages. Both these plans provide the policyholder with tax benefits. There is also no tax implied upon these two plans' death and maturity benefits. Also, investments of up to Rs 1,50,000 premium paid are eligible for tax benefits under Sections 10D and 80C of the Income Tax Act. 

Now that we have covered all the major details and differences between endowment plans and ULIPs, you can make a wise and well-informed decision. Make sure to consider your risk appetite, need for flexibility, knowledge of the market, the requirement for withdrawal, and other factors before buying one of these plans. Also, for more details on Endowment policy, read What is endowment policy and when you should go for it?

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