Which is better – ULIPs or Endowment Plans?
A life cover is inevitable to protect your loved ones at a time of despair. Having life insurance means your family is financially protected even in your absence and they can meet their day-to-day expenses and pay off their debts.
But for a lot of people, paying for insurance coverage without any investment element to it might seem unattractive. That is why life insurance policies, except term insurance, come with an investment of savings elements as well. There are mainly two types of life insurance policies that fall into this category – Unit linked insurance plans (ULIP) and endowment plans. Let’s see what they are first.
Unit linked insurance plan (ULIP)
They are life insurance policies with an investment element. A part of your amount invested goes for the life cover and the rest is invested in securities, according to a portfolio you have chosen. It has all the benefits of a traditional life insurance policy and it also helps you grow your money.
An endowment plan is the most popular life insurance policy. Here there is a savings element included. You can withdraw from endowment plans after a lock-in period or at maturity. It also gives your family financial aid if something unfortunate ever happens to you.
But what are the differences between these two? Let’s take a look –
- Savings vs Investment – As mentioned about endowment plans give you a savings option at the same time ULIPs give you an investment option. That means, just like a mutual fund ULIPs have a fund manager who will manage your money and invest it appropriately. You have adequate control over the investments as you can choose the fund to invest in from their list of options. ULIP also gives you the ability to switch between funds if there’s ever a need. While in endowment plans, the interest rates are pre-fixed and savings in calculatable. There is a limited growth option for your money as well.
- Risk vs returns – Higher the returns, more the risk. ULIP comes with higher risk than endowment plans as they are market linked. Markets could get volatile, and they could move down as well resulting in money loss. But at the same time, endowments plans have prefixed interest rates and there are no market related risks involved.
- Market knowledge – Since ULIP is market linked, market knowledge is necessary. You should be able to choose the fund to invest and in and switch between funds if there is a need. Since endowment plans are not market linked, market knowledge is not required.
- Lock-in period – Endowment life insurance plan’s lock-in period depends on the policy, but it is usually lesser than three years. At the same time, ULIPs have a five-year lock-in period.
- Withdrawal – There are fees and penalties associated if you decided to withdraw from an endowment plan. But you can withdraw your money from ULIPs post the five-year mandatory lock-in period. This makes ULIPs slightly more liquid.
The below table will summarise the key differences
|Market knowledge||Required||Not necessary|
|Lock-in period||Five years||Usually below three|
|Withdrawals||Fees and penalties may apply||Can withdraw after five years|
|Switching funds||Cannot make changes||Have option to switch funds|
|Decision on investment||Nothing||Have a limited say|
What should I choose?
The final choice between an endowment life insurance and ULIP depends on your investment appetite. Both provide similar life cover; the difference lies in how your money is handled. If you have more than basic market knowledge and you are not completely risk-averse, then you could choose ULIP, which invests your money in different securities. At the same time, if steady returns are what you are looking for them endowment plans might work better for you.
If you are still confused between the two, an advisory is something that could help you. Advisory is available on most insurance provider website these days. You can also make use of the tools like ULIP calculator to make sure you choose what is right for you.