Investment Plans February 11, 2021

Life insurance plans, except the term insurance version, come with additional benefits beyond the payment that is due upon the death of the life insured during the policy term. These plans are Unit-linked Insurance Plans (ULIPs) and Endowment Plans where you pay premiums to get life insurance as well as investment proceeds. There are maturity benefits associated with these insurance plans besides several other payouts. Given the similarities between the two, it’s only logical to compare them and find out the one you should go for. So, let’s start comparing the two.

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Comparison Between ULIPs and Endowment Plans

Although we can’t tell precisely which of the two will benefit you more, we can at least hint to you the one that is best suited for you. The old investment adage says – Higher returns often come with greater risks. So, choosing from the two will boil down to the investment mindset and financial goals of the particular individual. We can thus analyze the function of both ULIPs and endowment plans based on certain aspects. This way, you could not only know the difference between the two but also pick the best alternative for you. Let’s begin!

Which Offers More Assured Returns?

On the assured return front, endowment plans score over ULIPs by offering guaranteed returns to investors. Whereas ULIPs invest across stocks, bonds and other market instruments where returns can fluctuate based on price movements of these securities. Potentially, ULIPs can offer greater returns, albeit at greater risks.

What Will You Get at Maturity from ULIPs and Endowment Plans?

The money invested through ULIPs goes on to purchase different units at respective prices. At maturity, the accumulated units will get redeemed at the prevailing price. The redemption will give rise to a payout sum that you will get. Whereas with endowment plans, you will get the sum assured plus bonuses at maturity.

Which Allows You to Withdraw Money Quickly?

ULIPs come with a lock-in period of 5 years, which means you can’t withdraw money from this instrument for such a period. Whereas the early withdrawal from the endowment plan will depend on whether it has acquired a surrender value. Your endowment plan will acquire a surrender value if you pay the premium without fail for at least 3 years. The surrender value is thus disposed of to the policyholder on early withdrawal i.e. policy surrender. This is the general criteria for an endowment policy regarding the surrender value, the actual may vary, thereby reinforcing the need to go through the policy document carefully.

Which of the Two – ULIPs vs Endowment Plans – Offer More Flexibility?

ULIPs give individuals more investment options and allow them to switch between funds as per their choices. In contrast, there is no such offering with endowment plans. As far as premium payment term goes, both ULIPs and endowment plans come with single, regular and limited pay options.

Which of the Two is Better in Terms of Tax Benefits?

Tax benefits remained the same for both ULIPs and Endowment Plans until the Union Budget 2021 announcement wherein the government removed the tax exemption on maturity proceeds for ULIPs with an annual premium of more than INR 2.5 lakh. As per the announcements, ULIPs purchased on or after Feb 1, 2021, will come under the purview of this latest change in the tax norm. These ULIPs will get taxed at 10%, except on INR 1 lakh where taxes won’t apply. For endowment plans, policyholders won’t have to pay any tax on maturity proceeds. However, the death benefit will remain free of tax in either of the two.

So Which Should You Choose?

Choosing between the two will depend firmly on your investment goals and risk appetite. If you can afford greater risks and have ambitious goals like buying a home, maybe you should consider choosing the best ULIPs available in the market. In case your risk appetite is on the lower side, you will appreciate the idea of guaranteed income that endowment plans are best suited for. And on tax benefits, endowment plans can prove better in some cases as explained above.

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