ULIPs vs endowment plans

What is the first thing you think of when you talk about life insurance? It's the life cover, isn't it? For many people, it is the life cover that first comes to mind. It ensures that in case of the policyholder's demise, their family and dependents are financially secure. So far, so good.

More specifically, endowment plans offer the added advantage of savings, while (ULIPs) give policyholders the opportunity to grow their investments. Many first-timers in the insurance market may find themselves confused between these two types of life insurance plans

So, let's dig a little deeper and find out what the ULIPs vs. endowment plans dilemma is all about.

An endowment plan is simply a life insurance plan that offers a life cover along with a maturity benefit. This maturity benefit makes up the savings component of the endowment plan. So, an endowment plan can help the policyholder save up for the future. If the policyholder survives the policy tenure, the insurance provider pays out the lump sum amount guaranteed as maturity benefits under the plan.

The ABSLI Vision Endowment Plus Plan is an example of an endowment plan that offers secured savings.

, on the other hand, are insurance-cum-investment products. The offer a life cover to the policyholder, as all life insurance plans do. In addition to this, they also give policyholders the opportunity to create wealth over the long term. The premium that you pay for ULIPs is utilized not just to provide you a life cover, but is also invested in the capital market. In other words, ULIPs invest a part of the premium in equity funds, debt funds or balanced funds, among others.

For instance, the ABSLI Wealth Assure Plus plan is a Unit Linked Insurance Plan that offers a choice of 16 funds to select from.

Upon maturity, endowment plans pay out the guaranteed maturity benefits to the policyholder. These returns are generally fixed, so you know exactly how much you will receive when the policy matures. In addition to these guaranteed benefits, endowment plans also pay out bonuses, if any.

In the case of ULIPs, the returns paid out on maturity depends upon the performance of the markets. The units you invested in will be redeemed at the market price prevailing at the time of maturity. So, these returns cannot be quantified beforehand.

Let's take up a very basic example to understand this. Say you had purchased a Unit Linked Insurance Plan some 20 years back. At that point, you invested in equity funds. Today, 20 years later, say there are 10,000 units in your portfolio, and the prevailing market price is Rs. 15 per unit. Your returns upon maturity will then be Rs. 1,50,000 (Rs. 15 x 10,000 units).

Endowment plans do not have any specific provisions for withdrawals and lock-in periods. They have a maturity period, during which the life cover continues to remain in place. Policyholders can surrender the policy before the end of the maturity period. But this is subject to restrictions and/or penalties. And in case you surrender your policy before the maturity period ends, your life cover will not be valid anymore.

For ULIPs, on the other hand, there is a clear and compulsory lock-in period of 5 years. Withdrawals are only allowed after this period.

Endowment plans offer moderate levels of flexibility. The policyholder does have the power to decide where the funds are invested. But with the top-up facility, they can enhance the coverage and the benefits due. Also, once invested, you cannot switch your funds from one kind of investment to another.

Unit Linked Insurance Plans offer more flexibility to the policyholder. When you purchase a ULIP, you can choose from among different investment options like equity funds, debt funds and balanced funds, among others. ULIPs also allow you to switch your money from one fund to another each policy year. So, for example, say you had initially invested a larger portion of your money in equity funds. But now, you want to take on a safer, low-risk approach. In that case, you can switch to debt funds in your ULIP.

Here's a quick comparison between the two types of insurance plans.

So, this sums up the comparison between endowment plans and ULIPs. Despite these differences, they do have one common aspect - tax benefits. Both ULIPs and endowment plans offer tax benefits under section 80C and section 10(10D) of the Income Tax Act, 1961. As per section 80, the premiums that you pay can be deducted from your total income. This will reduce your tax liability. And as per section 10(10D), the death benefits and maturity benefits are exempt from tax.