Traditionally, life insurance policies are used to provide the singular feature of life coverage only. However, as times progressed and people’s financial needs changed, life insurance has also undergone much transformation. Now, one can buy life coverage via a variety of plans, each suited for policyholders with varying tastes. Some popular options in this sector include an endowment plan, a ULIP, and the conventional term plan. For someone planning to buy or review a life insurance plan, it may get a bit confusing to understand the differences between these three, as well as the pros and cons of each policy.
To help you out, we take a look at several factors through which one can distinguish between endowment plans, term plans, and ULIPs.
- Primary feature of each policy
An endowment plan is a type of life insurance plan that provides two benefits – life coverage as well as a savings plan. The premium you pay for the plan is used for two purposes – one portion goes towards building the life cover corpus and the other towards accumulating a lump-sum amount to be given on policy maturity. If the policyholder passes away during the policy tenure, the loved ones receive the sum assured amount. In case the policyholder outlives the maturity of the policy, they receive the amassed savings.
A term plan is a pure protection plan. That is, it does not have any other major feature other than providing you with financial protection against risks to your life. It is the simplest and the most accessible of all life insurance plans in the market. As the name suggests, a term plan provides protection for a limited period only.
A ULIP, on the other hand, is a mixture of insurance and investment. While one portion of the premium builds the life corpus, the other is invested into market-linked or debt instruments. This investment gathers returns based on market performance, and they are paid to the policyholder on the surrender or maturity of the policy.
- Risk factor with each policy
Endowment plans carry low to no risks since it has a savings component attached to them. So, the funds are parked in low-risk, fixed-income securities where they remain largely unaffected by the workings of the market. If you have opted for a participating plan, then you may have to bear a few risks since the bonus depends on the profits of the insurance company. So, the past profits of the company are one of the most important things to consider when buying an endowment plan.
There is no risk at all when it comes to a term plan since they are solely concerned with providing life cover. The only advice here would be to stick with a reliable insurance provider.
The risk factor amongst all three policies is the largest in a ULIP policy. If you have a large risk appetite, then you can go for equity-oriented ULIPs. Along with high risks come high rewards. You can lower the scale on both by opting for debt ULIPs too. ULIPs that offer hybrid funds are available as well.
- Returns on each type of policy
An endowment plan offers medium returns as they are savings-oriented rather than investment-oriented. However, these returns are guaranteed for the most part. If you opt for the participating feature mentioned earlier, then your corpus also receives the addition of a bonus at regular intervals.
To state the obvious, there are no returns on a term plan since it is a pure protection plan.
The returns on a ULIP plan depend on the performance of the funds in the market. Equity ULIPs offer high returns, while the returns on debt funds are comparatively lower yet considerable.
There are several other minute differences between endowment plans, term plans, and ULIPs. The best option is to look at your life coverage needs, your financial objectives, and your risk appetite before choosing a suitable policy for yourself. One of the most important things to consider when buying an endowment plan, a term plan, or a ULIP, is the policy wordings.
One common benefit of each type of policy (besides the default life coverage) is the tax advantage aspect. Policyholders can claim tax deductions up to Rs 1.5 lakhs against the premium for any kind of life insurance policy. Plus, the maturity proceeds are also tax-exempted to a certain extent. These benefits may change as tax laws go under amendments.