What is the Difference Between a ULIP and a Traditional Plan?

The variety of life insurance products now available in the market often make the selection difficult for the buyers. Choosing between a ULIP or traditional policies like term plans and endowment plans puts many in a dilemma. Read this post to understand the significant differences between the two and select the best.

Now that you have decided to purchase life insurance, the next step is to select a policy. But search for it online, and you will come across different types of policies from several insurers. Many get confused between Unit-Linked Insurance Plans and traditional plans while purchasing life insurance.

While both are life insurance products, some factors differentiate them. It is essential to understand these differences to make the right decision. To help you pick the best, here are 5 of the most significant differences between ULIP and traditional policies-

  1. Type and Purpose

While both are types of life insurance policies, their purpose is different. A conventional plan like whole life policy, term policy, or an endowment policy only offers life coverage. However, unit-linked plans are investment cum insurance schemes. A part of the premium you pay for a unit-linked plan is invested in the fund of your choice and generates market-linked returns.

On maturity, while a traditional plan offers fixed returns, a unit-linked plan provides returns that are market-linked and not fixed.

  1. Plan Flexibility

As mentioned above, a part of the ULIP premium is invested in the fund of your choice. You get the opportunity to invest in options like equity and debt, and you can also divide the premium amount between investment and insurance.

You can select a fund based on your risk appetite, age, and financial goals, and even decide how much you want to invest. It is also possible to switch between funds during the policy period.

The features mentioned above make ULIPs highly flexible. However, traditional plans are not known to offer this flexibility.

  1. Lock-in Period

With unit-linked plans, you get a lock-in period of 5 years. On completion of the lock-in period, you can exit the plan. You will receive the positive or negative returns generated by your investment post the exit. Exiting before the lock-in period will require you to pay the penalty.

In traditional plans, there is no concept of lock-in. The lock-in period is generally considered to be the maturity period. For example, if you purchase a 20-year term plan, the lock-in period will be 20 years.

  1. Security

In ULIPs, you invest in market-linked funds, which are not secure. Meanwhile, traditional plans offer fixed returns, offering more security to the insured. However, in the longer run, even unit plans generally generate handsome returns.

Experts recommend that you should remain invested in these plans for the entire tenure to reap benefits. Exiting right after the lock-in or before that could impact the returns and your long-term goals.

  1. Partial Withdrawal

In case of a financial emergency, rather than exiting a ULIP, you can consider the partial withdrawal option. But partial withdrawal is allowed only when the fund value is more than the minimum value of the fund. There can also be some other conditions based on the insurer you select.

The partial withdrawal facility is not available in traditional plans. But some insurers offer loans against traditional life insurance plans.

What Should You Select?

As can be seen above, both unit-linked plans and traditional plans have their benefits. While unit-linked schemes offer a powerful blend of life cover and investment, traditional policies are more secure and provide fixed returns.

If you are comfortable with the risk and want to earn returns from your life insurance investment, a unit-linked plan can be a smart choice. If you are looking for a risk-free plan to secure the financial future of your family, you can select a traditional policy.

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