Life Insurance 238 views July 17, 2021

Linked vs Non-linked Life Insurance Plans – Which Should You Choose?

Most believe that life insurance plans provide only a safety net to the family of the deceased person. But that’s the case with term insurance plans only. Other life insurance plans have an investment component too to woo the investor in you. These plans provide the usual life cover upon the death of the life assured while also helping individuals earn a return on the premium they pay to the insurer at regular intervals or once during the policy term. The overall payout from life insurance plans, to a great extent, will depend on their type – linked and non-linked. Both linked and non-linked plans are good and serve unique purposes.

So before choosing between the two, you should understand their basics first. Considering the same, we will define linked and non-linked insurance plans before comparing them based on several aspects. This way, you can not only grasp the concept of these two plans better but also choose the right one for yourself. So, keep reading!

What are Linked and Non-linked Life Insurance Plans?

Linked insurance plans are those plans that invest in the stock market and can generate massive returns for the investor provided the market remains on a high for sustained periods. Unit-linked Insurance Plans are an example of such plans. Whereas non-linked insurance plans don’t invest in stock markets. Either they invest in products offering guaranteed returns or provide just a life cover for the premium you pay. Non-linked plans include endowment plans, money back plans, term insurance plans, etc. While endowment plans invest in products offering guaranteed returns, money back plans come with an extra feature of survival benefit by which the policyholder receives a fixed sum at specific times during the policy term. Term insurance plans only pay the family of the person if he/she dies during the policy term.

How to Choose Between Linked and Non-linked Life Insurance Plans?

As pointed out above, choosing between the two will depend on your goals besides your risk-taking capabilities. So, it’s important to consider the likely returns and flexibility when looking to achieve your financial goals. We’ve focused on these points below. Take a look.

Expected Payouts – Payouts for linked insurance plans can be more than that of their non-linked counterparts. The reason being linked plans invest in the high-return proposition of stocks. But returns are not guaranteed as unfavourable economic, political and social developments, if sustained for long, can decrease the growth of investments made in stocks. So, both return probability and risks are high in linked plans.

Whereas non-linked plans invest in products offering guaranteed returns, thereby ensuring the money promised to you at inception. However, the return amount won’t be at par with that of linked plans. Your risk appetite thus comes into play when deciding to choose between the two. If you can handle high investment risks and want a massive corpus, linked plans are for you! Otherwise, put your money in non-linked plans.

Investment Flexibility – One does consider flexibility when choosing an investment. Here linked plans have a clear advantage over their non-linked counterparts. Linked plans allow you to choose from a wide range of investments and investment strategies according to your goals and risk appetite. So before taking such plans, do read their brochure carefully and understand the operational methodology of investment options offered by them. In comparison, you can’t choose the investment when putting your money in non-linked plans.

Switching – What if you are allowed to switch your investments from one fund to another? This is what you get when investing in a linked plan. Such flexibility is not the case with non-linked plans.

Withdrawals – While putting the money in any life insurance plan is paramount, the possibility of withdrawing the same is not ruled out either. Financial emergencies can come anytime and force you to withdraw your investments. But the key is whether you are allowed to do so. In case you are, can you do it anytime or have to wait for the same? These are some important considerations to make. ULIPs, a type of linked plan, allow partial withdrawals after a lock-in period of five years. Whereas you can withdraw your money from non-linked plans such as endowment plans after they acquire a surrender value. The surrender value comes after paying the premium for two-three years without fail.

The Bottom Line

Irrespective of the growing debate on linked vs non-linked insurance plans, one should not hesitate in getting a term insurance plan as it offers high coverage for the low premium. The premium remains fixed throughout the policy term, a feature that you don’t see in other insurance plans. The point is to choose among ULIPs, endowment and money back plans. As explained in the article, people who can take greater risks should invest in linked plans such as ULIPs. Whereas people with a low-risk appetite are better off investing in endowment and money back plans. In case your investment goal is very high but the risk appetite is low, you can choose to invest in both at varying proportions. Hope you make the right choice based on the explanation made in this article.

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