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How Do ULIPs Differ from Traditional Life Insurance Policies?

To safeguard the financial health of your loved ones from any uncertainties, having life insurance is a must. The life cover that a life insurance offer ensures that in your absence, your loved ones would not face any financial difficulties. Nowadays, there are a variety of life insurance plans that a consumer can choose from. Earlier, these were only traditional life insurance plans, but seeing the needs of people, insurance companies have come up with unique plans like Unit Linked Insurance Plan (ULIP)

Traditional plans and ULIPs, both have their unique features, drawbacks and benefits. Before knowing the difference between them, it is essential to understand the meaning of ULIP.

What are ULIPs?

A ULIP plan offers life insurance along with opportunities for investment. The premiums you pay for the plan are partly used towards providing you with a life cover and partly invested in funds of your choice. The life insurance part of the plan is similar to any other life insurance product type. The policyholder gets a life cover for the entire duration of the policy. When it comes to investments, an individual can choose where they want to invest amongst different funds. Depending on their financial planning and risk-taking ability, they can namely invest in any of the three broad categories: equity, debt, and balanced funds. Equity funds are usually preferred by individuals who want high returns and are ready to take the high risk for it. Debt funds are selected by policyholders who want to put their money in safe investments even if they offer lower returns than equity. For people who are willing to take some amount of risk, there are balanced funds. They comprise both, equity and debt funds. They usually provide moderate returns.

How is ULIP different from traditional life insurance policies?

Once the meaning of ULIP is known, it becomes quite evident how different it is from traditional life insurance. Below are some key points of distinctions between ULIP and traditional life insurance.

  • The purpose of the policies

Traditional life insurance policies only serve a single purpose to the policy – of providing them with a life cover. It is quite simple to understand, since they are pure life insurance policies with no investment or saving components attached. Even the ones that have a savings component attached usually provide nominal returns, since they are low risk saving plans. On the other hand, ULIPs are unique plans that also offer investment opportunities along with life insurance. Their purpose is to generate wealth over the long haul along with providing adequate cover. ULIPs are directly linked to the market and their returns depend on how the market is performing.

  • Flexibility in terms of investment

Traditional life insurance does not give a variety of fund options to select from for your investment. Instead, the company will invest the money based on the fund allocation that they find appropriate. ULIP is a plan where an investor chooses where they want to allocate their funds. Investors can choose their fund allocation and if they are unhappy with the performance, they can also change their fund allocation. ULIP has unique features like premium redirection and fund switching, which allows investors to change their fund allocation. They can redirect their premium to a different fund or switch their fund allocation to a new fund if they are unhappy with the performance of their current fund.

  • Withdrawals

Conventional life insurance plans do not allow policyholders to withdraw funds from their policy. However, some policies do offer policyholders the option to take a loan mortgaging the policy. While with ULIPs, you can withdraw funds anytime you want after the lock-in period of five years. Most insurance companies offer partial withdrawals for free.

There are several parameters where a ULIP differs from that of a traditional life insurance plan. This is because a ULIP is a modern plan and is much more flexible than its traditional counterparts. Also, its unique features make it a popular choice amongst policyholders.

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