When it comes to a choice of taking a life insurance policy, one of the most common dilemmas people face is taking decision between Unit Linked Insurance Plan (ULIPs) and Non-Linked Life Insurance Policies. Both types of policies offer best unique features, benefits, and structures that can suit different needs of a person. Understanding the differences between these two types of life insurance policies can help you make an informed decision that aligns with your financial goals.
In this educational blog, we will compare the two types of insurance policies including features and benefits and use the policies of the largest life insurance company, the Life Insurance Corporation of India (LIC) as real-life examples to help you better understand each.
What are Unit Linked Insurance Plans (ULIPs)?
A Unit Linked Insurance Plan (ULIP) is a combination of life insurance and investment. The premium paid by the policyholder is used to provide life coverage and simultaneously invest in various market-linked instruments like stocks, bonds, and mutual funds.
The key characteristics of ULIPs are:
Investment Option: ULIPs allow the policyholder to choose the fund in which the premium is invested. These funds can be equity-based (higher risk, higher returns), debt-based (lower risk, lower returns), or a mix of both.
Market-Linked Returns: The returns on a ULIP are directly linked to the performance of the investment market. This means returns can fluctuate based on market conditions. The return is more as compared to Non-linked policies.
Flexibility: ULIPs offer policyholders the flexibility to switch between funds, top-up their premiums, and even partially withdraw from the investment portion.
Charges: ULIPs are known to have multiple charges, such as fund management charges, policy administration fees, and mortality charges, which can impact the returns.
Example: LIC’s Index Plus (ULIP)
One of the most popular ULIPs offered by LIC is LIC’s Index Plus. This plan allows policyholders to invest in a variety of funds like equity, debt, and balanced funds. The premium paid is used to provide life coverage and also invested in the chosen funds. The performance of the policy depends on the market performance of these funds. It offers the flexibility to switch between funds, making it ideal for individuals seeking growth based on market conditions.
What are Non-Linked Life Insurance Policies?
Non-Linked Life Insurance Policies, on the other hand, are traditional life insurance products that offer pure life cover without any market linkages or investment components. These policies provide a guaranteed sum assured on death and sometimes additional benefits, such as bonuses, depending on the policy.
The key characteristics of Non-Linked Life Insurance Policies are:
Guaranteed Coverage: These policies offer fixed life cover, ensuring that a specified sum will be paid to the beneficiary in case of the policyholder’s death.
No Investment Component: Unlike ULIPs, non-linked policies do not invest the premium in any financial instruments or the market. Therefore, they provide stability but with no opportunity for market-linked returns.
Fixed Premium and Benefits: Premiums are fixed, and the benefits remain predetermined, regardless of market fluctuations.
Bonus Facility: Some traditional policies offer bonuses, which are additional sums paid to policyholders at the end of each year, depending on the insurance company’s performance.
Example: LIC’s Jeevan Labh (Non-Linked)
LIC’s Jeevan Labh is a popular non-linked policy from LIC. It provides a combination of protection and savings. It offers life coverage and also provides a lump sum amount in case of the policyholder’s demise. Unlike ULIPs, it does not invest in the stock market or mutual funds. The returns are predictable, and the policyholder knows exactly how much to expect. Moreover, LIC offers bonuses on the policy, which further increases the sum assured over time.
Comparison Between ULIPs and Non-Linked Life Insurance Policies
| Feature | ULIPs | Non-Linked Policies |
| Premium Allocation | Partly invested in market instruments (stocks, bonds). | Entire premium used for providing life cover. |
| Investment Option | Policyholder can choose the investment funds (equity, debt, etc.). | No investment option. |
| Risk and Returns | Market-linked returns with fluctuating risk. | Fixed benefits, no risk of market fluctuations. |
| Flexibility | Allows switching between funds, top-ups, and withdrawals. | Limited flexibility. |
| Charges | Fund management, policy administration, mortality charges. | Fewer or no charges apart from basic premiums. |
| Returns | Fluctuate based on market performance. | Fixed benefits and bonuses, stable returns. |
| Ideal For | Investors who want to take calculated risks for potentially higher returns. | Individuals seeking stability and predictable returns. |
Which One Should You Choose?
Choose ULIPs if:
- You are willing to take some market risk for potentially higher returns.
- You are looking for a product that provides both life coverage and investment opportunities.
- You want flexibility in managing your policy, such as the ability to switch between funds or make top-ups.
- You have long-term financial goals and are comfortable with market fluctuations.
Choose Non-Linked Policies if:
- You are risk-averse and prefer stability over market-linked returns.
- You want a straightforward life insurance policy that guarantees fixed benefits and coverage.
- You are looking for an investment with predictable returns and a sense of security.
- You prefer traditional policies without having to worry about market risks.
Conclusion:
In conclusion, both Unit Linked and Non-Linked Life Insurance Policies come with their own sets of advantages and drawbacks. Your choice will ultimately depend on your risk tolerance, investment goals, and need for life coverage.
For those seeking a balanced approach to insurance and investment, LIC’s Index Plus (ULIP) may be the right choice. However, if you are looking for a simple, no-frills life insurance policy, LIC’s Jeevan Labh (Non-Linked) might be more suited to your needs.
At Make My Insurance, we provide both ULIPs and Non-Linked policies from LIC to ensure that you can find a solution that fits your specific needs. Always consult with a financial advisor to ensure you’re making the best decision based on your financial goals and risk profile.