Every investment decision involves a risk-return trade off. In other words, a financial instrument that provides high returns would entail high risk and vice versa. Hence it is important to differentiate between need-based vs greed-based investing. Pure insurance products are primarily low risk offering low returns,but are suited to the life cover needs of the investor.
Such policies are referred to as non-linked i.e. the returns are not correlated to market performance. On the other hand, hybrid insurance cum investment products like ULIPs are preferred by the moderate – risk appetite investors with market linked returns. Such plans are called as linked plans.To help compare linked and non-linked plans, we shall study the difference between the two.
These are also termed as Unit Linked Insurance Plan (ULIP). As the word reveals, these are market-linked investments, which are partially or wholly dependent upon the performance of the underlying assets, along with additional protection cover.
These are the traditional life insurance plans, with low-risk, offering fixed lump sum on maturity in addition to declared bonuses (in case option to participate in profits is selected by the insured). Some classic examples are the Endowment and Money back plans. At the time of maturity, a policyholder gets tax-free fund value, including bonuses.
5 Differences between Linked and Non-linked Plans:
The investor has to prioritize between insurance needs and investment growth while deciding between linked plans and non-linked plans. The following are the considerations:
- Flexibility: A ULIP insurance also provides the advantage of investment options from equity, hybrid and debt based on the investor’s risk appetite. In non-linked plans, the funds will be invested as per the fund details.
- Transparency: In case of ULIPs, it is possible to track one’s portfolio, with information on fund allocation regularly available to the investor. On the other hand, since non-linked are primarily insurance products, one cannot track the portfolio as investment details are not declared.
- Withdrawal: In case of ULIPs, withdrawals are allowed after a lock-in period of five years. There are restrictions on withdrawal in case of non-linked plans.
- Switching: ULIPs allow investors to switch between funds, while this feature is entirely lacking in non-linked plans.
- Maturity: ULIPs provide superior market-based returns at the time of maturity on prevailing unit prices. Conventional non-linked plans deliver guaranteed proceeds on maturity.
After evaluating the features of linked and non-linked plans, it may be concluded that ULIPs are suited for investors who seek life cover as well as debt-equity investment mix in a single product, with flexibility to switch between funds. Furthermore, additional ULIP benefits are as follows: The sum assured as agreed in the policy, plus, the balance in the unit fund or higher of the sum assured as agreed in the policy or the balance in the unit fund.
With additional benefits incorporated in the new ‘4G ULIPs’ like negligible commission fees, management charges capped at 1.35% by IRDA and return of mortality charge by companies like Bajaj Allianz Life Insurance, ULIPs are proving to be market disrupting, game changing investment avenues. Hence, a prudent investor should consider inclusion of ULIPs in their investment portfolio to achieve the ideal insurance-investment balance.