Before you decide between Unit-linked Insurance Plans (ULIPs) and an endowment plan, it is recommended you clearly understand your requirement. You must decide whether you want insurance coverage or return on investment. Maximizing both of these objectives with a single product is not always possible.
Endowment plans or traditional insurance policies may offer several benefits. However, in most cases, the benefits may not be as high as they seem. Low-cost ULIPs are beneficial to maximize the returns on your investments. Moreover, you may be able to avoid the confusion of availing insurance coverage because ULIPs provide some basic life cover. However, when you invest in ULIPs, you need to clearly have a single objective of earning returns on your investments.
Here is a comparison between a low-cost ULIP plan and a traditional insurance policy.
- Associated charges
These charges are deducted from the premium amount before the balance is invested in funds of your choice. In most cases, there are four such costs, which include fund allocation, mortality, administration, and fund management charges. These charges are included in the insurance coverage of the plan. When these costs are higher, the investible capital reduces, which reduces the amount available to maximize your returns.
Endowment plans work as traditional insurance policies, which means their administrative costs are significantly higher than the ULIP charges. Most of the low-cost ULIPs levy charges that are between 1.5% and 2.5%, which provides you with a higher investible capital.
Compared to endowment plans, ULIP investment offers greater versatility. Although ULIPs come with a minimum lock-in period of five years, you may partially withdraw from the accumulated corpus at the end of this time. Therefore, if there is an emergency fund requirement, you are able to tap into your ULIP to meet such needs. Additionally, you may switch from one fund to another when you invest in ULIPs to maximize the returns on your investments. Insurance companies also allow you to pay a top-up premium at irregular intervals, which is over and above your regular premium. This increases the investible capital, which provides you with the opportunity to earn higher returns on your investments. Therefore, ULIPs are a flexible and open investment.
- Returns on your investments
The most important objective of investments is to earn the highest possible returns. ULIPs invest the fund corpus in various financial instruments, such as debt, money market, and equities. This provides you with a higher opportunity to earn more returns on your investments. Moreover, you are able to balance the risks by combining investments in debt and equity instruments. However, it is important that you remain invested for the long-term and do not make hasty investment decisions based on short-term market fluctuations.
In comparison, returns on safer endowment plans are between 5% and 6%, which does not even cover the rate of inflation. When you hold your ULIPs for a longer period, you may enjoy returns as high as 12% to 16%, which helps build wealth.
Endowment plans are not completely transparent products. These instruments do not give you information on how much premium is invested and about the rate of interest on such investments. Moreover, there is no upper limit on the commission that is paid to the agent. In several cases, as much as 40% of your first year’s premium is paid to the agent, which reduces your investible capital. The third lack of transparency is that endowment plans are unreliable and ambiguous because they do not adhere to any uniform surrender charges and schedule.
On the other hand, ULIPs offer complete transparency and you are in complete control of how much money is invested and where it is invested. You may choose the different funds where you want your premium to be invested. Moreover, you may switch from one fund to another if the performance is not as per your expectations. However, if you do not have a thorough understanding of the financial markets, it is recommended you opt for the services of an experienced and professional fund manager to make investment decisions. Fund management charges are the same whether you choose the automatic investment option or retain control of your investments. There is no ambiguity in the surrender value if you do not want to stay invested at the end of the minimum lock-in period. Even if you surrender the policy before the five-year period, the amount is held in a discontinuance fund, which continues delivering small returns at minimum 4%.
With the advent of the online era, staying abreast of market movements and trends is easier than before. Contrary to common belief, there are no great risks associated with ULIPs simply because the returns are market-linked and subject to their movements. You may easily compare various low-cost ULIP policies online and analyze their performance to make informed investment decisions. Additionally, an online ULIP calculator is beneficial in helping you understand the potential returns on your investments based on different parameters.
Information is key. Do not waste your time and money in choosing investments that do not deliver higher returns. Take control of your investments and opt for ULIPs today.