ULIP vs. Endowment Plans - Which Is More Suited for You and Why?

Mumbai, October 17, 2020

Many people have realized the importance of securing their life and the financial future of their families due to the coronavirus (COVD-19) pandemic. Therefore, the need for life insurance policies has increased significantly. As there are different types of insurance plans available in the market, people are confused about which form of life policy can meet their financial goals. A common question, which they ask, is whether to buy an endowment plan or a Unit-Linked Insurance Plan (ULIP). To clear your confusion and choose the best insurance plan, we have done a detailed comparison between ULIPs and endowment plans. However, first, let us understand what is ULIP plan and endowment policy.

ULIP is a kind of insurance policy that provides life cover and plays a vital role in wealth creation. Under this plan, a portion of the premium is invested in equity, debt, or a mixture of both as per your risk-taking ability. Conversely, an endowment plan offers death and maturity benefits, just like any other traditional life insurance policy.

ULIP vs. endowment plan: Which is a better option? 

Here, we have compared both these alternatives based on various factors:

 Premium 

As ULIP offers the combined advantages of life insurance and investment, it comes at a higher premium as compared to an endowment plan.

 Flexibility 

While investing in a ULIP, you have the freedom to choose the type of fund, switch from one fund to another, make partial withdrawals, and purchase top-ups to widen the scope of the policy. On the other hand, an endowment plan enables you to broaden the coverage, as you can buy different top-ups. However, it does not provide any other flexibility.

 Returns 

ULIP returns can be significantly higher than endowment plans, especially if you have invested in an equity fund, as the performance depends on how the capital market fares. Therefore, it is advisable to stay invested for a longer duration to avail of better returns. On the contrary, endowment policies can assure guaranteed returns on death and maturity, and they are not dependent on the market’s performance. Besides this, you can keep an eye on the performance of a specific fund by checking the present ULIP NAV. Doing this enables you to switch from one fund to another to avert the risk and maximize the returns on investment.

 Wealth creation 

Investments in ULIPs assist in generating wealth in the long run. The power of compounding also comes into the picture over here. Compounding allows you to accumulate a vast corpus if you stay invested for a longer duration. This amount will depend on the ULIP NAV during maturity. The corpus can help you plan for financial goals like retirement, your children’s higher education, and their wedding. When it comes to an endowment plan, you only receive the assured maturity benefit and applicable bonus, if any. Therefore, ULIP returns are higher as compared to an endowment policy.

 Lock-in period 

ULIP has a mandatory lock-in tenure of five years. The endowment policy's lock-in duration depends on the type of plan and the tenure of premium payment. Usually, this period is around two to three years. 

 Partial withdrawal 

One of the best benefits of investing in the ULIP is that partial withdrawal is allowed after the mandatory lock-in period of five years. In case of an endowment plan, you cannot withdraw funds. 

Securing the financial aspirations and monetary future of the family is essential if you want your loved ones to live a peaceful life when you are not around. Therefore, you need to select the insurance policy that can meet your family's financial goals during your absence.

Though ULIPs and endowment plans have their unique benefits, it is recommended to pick a policy based on your risk-bearing ability. If you are content with guaranteed but low returns, then endowment plans are an ideal option. However, if you want substantial returns, you can opt for ULIPs. Here, higher ULIP plan returns are subject to higher risks, particularly in the case of equity funds. So, analyze all aspects and make a wise investment decision.

(Disclaimer: This is branded content. Readers are advised to exercise due discretion before entering into any correspondence, investment, purchase, business dealings or any other decision on the basis of this content.)

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