Difference between ULIP and Traditional Plans

With the advent of ULIP, investors rarely opt for investing in traditional insurance plans. The conventional insurance plan offers a lump sum amount with specific bonuses upon its maturity period. In addition, the policyholder receives a fixed and guaranteed benefit, whether alive or dead. Let us discuss the difference between ULIP and traditional plans to better comprehend as to which plan looks more promising. 

ULIP Vs. Traditional Plan

A policyholder must apprehend the best saving and investment plan before investing in the savings and investment plans. When it comes to ULIP Vs. Traditional plan, the difference between ULIP and traditional plan can be understood on the following parameters.

1. Types

   The difference between ULIP and traditional plans can be understood on the basis of their types. Therefore, an investor needs to analyze what the plans are offering before investing in such schemes. When it comes to ULIP Vs. Traditional plan, ULIP offers two kinds of benefits to a beneficiary. Firstly, it provides life coverage to an individual and guarantees a fixed rate to an individual on the maturity of the plan. Secondly, it offers him the opportunity to make the investment in order to achieve the long-term financial goal. 

   Traditional plans are pure insurance policy schemes. It guaranteed fixed income and insurance policy to the policyholder. However, the risk involved in a traditional plan is comparatively low compared to ULIP.

2. Returns

   Under the ULIP plan, the policyholder can be responsible for the overall returns received on the investment. It is at the discretion of the policyholder to choose the fund instrument to invest the amount. The returns on ULIP are exclusively linked to the market, and the investor is the one who chooses among the equity and debts or hybrid instrument to make the investment. When he deems fit, the policyholder may switch the investment plan and move to equity from debt. 

   Traditional plans provide a fixed return to the beneficiary since the risk involved under the traditional insurance plan is relatively low compared to the ULIP. 

   Therefore, when it comes to comparing ULIP Vs traditional plan, the returns on the traditional plan could be low due to the involvement of less risk, and the returns on ULIP could be high since the returns explicitly depend on the market performance of the instrument and choice of the investor.

3. Charges

   The difference between ULIP and the traditional plan can be further understood on the basis of the expenses charged by the authorities. The government ministry- IRDAI (Insurance Regulatory and Development Authority), has set no limit for deducting funds under certain charges. Hence, the expenses to manage ULIP Vs. Traditional plans could be high. 

   The ULIP plan includes switching charges, fund management charges, premium allocation charges, withdrawal charges, insurance premium allocation charges, administrative charges, etc. On the other hand, the traditional plan includes premium allocation charges and mortality charges. Hence, the expenses incurred under certain charges could be higher in UILP compared to the conventional plan since ULIP has several charges. So, one can come to a conclusion on the benefit of ULIP Vs. Traditional plan on the basis of commissions charged by the authorities.

4. Lock in period

   The lock-in period of ULIP plans is less compared to a traditional plan. For example, before 2010, the lock-in period of ULIP was three years, which was later extended to five years by amending the ULIP plan. So five years is a mandatory period for the ULIP plan. On the other hand, the fund under the traditional plan is locked till its maturity.

5. Transparency

   While comparing the difference between ULIP and traditional plans, one can note that the policyholder can keep track of his investment portfolio. The policyholder is the one who selects the investment type while investing in the ULIP plan. However, while comparing ULIP Vs. Traditional plan, the investment portfolio of the conventional plan remains to be undiscovered and hidden by the policyholder.

Conclusion

On the basis of the difference between ULIP and traditional plans, as explained above, one can understand why policyholders are leaving traditional plans and switching to the ULIP plan. ULIP plans favor risk appetite investors who believe in the insurance policy and investment. On the other hand, conventional plans are suitable for policyholders who believe in guaranteed returns. ULIP plan can also be termed a Systematic Investment Plan (SIP). However, the traditional plan lacks this feature.

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