Understanding ULIPs and Endowment Plans Selecting the Right Financial Tools to Build Wealth for the Future

 

In this policy, the investment risk in the investment portfolio is borne by the policyholder.

Today, everybody understands the importance of investing for the future. From saving for retirement to building a corpus to pay for a home, we must find investments that help us meet our financial goals. You might want to consider Unit-Linked Insurance Plans (ULIPs) or Endowment Plans to help you meet your financial goals. Both offer insurance coverage with added benefits. So, how can you choose the right plan for your needs? Let's better understand both options to help you make an informed decision.

What Is a ULIP?

ULIPs are financial products that combine insurance with investment. A part of the premium goes towards providing insurance coverage, and the rest gets invested in various funds. Your ULIP returns depend on the performance of the funds you invest in, such as equity, debt, or a combination of both.

What Is an Endowment Plan?

Endowment plans are traditional insurance policies that offer an additional savings component. These plans have a fixed term that pays out a lump sum equal to the sum assured on maturity. They provide fixed and guaranteed returns, so you know exactly how much you will get when the term lapses. The beneficiary receives the sum assured if something happens to the policyholder during the policy term, following which the policy ends.

Understanding the Benefits of ULIPs and Endowment Plans

Let's better understand the benefits of these plans.

• Insurance Coverage

  Both ULIPs and endowment plans offer life coverage for the policyholder, providing their loved ones with financial stability and security.

• Returns

  Your ULIP investment offers market-linked returns. ULIPs have the potential to provide higher returns, but they depend on market conditions.

  Endowment plans offer a guaranteed amount on maturity. Policyholders can opt for a policy with profits to get the sum assured plus accrued bonuses on maturity. The returns from endowment plans can be lower than your ULIP returns.

• Lock-in Period

  ULIPs have a minimum lock-in of five years. They encourage disciplined investment, helping you build a corpus in the long term.

  Endowment plans come with a lock-in period that ranges from three to five years, depending on the selected policy.

• Investment Decisions

  ULIPs allow policyholders to make investment decisions. You choose the fund allocation and can make switches over time to take advantage of market conditions.

  Endowment plans do not allow policyholders to make any investment decisions.

• Transparency

  You can track your fund performance and view your allocation when you invest in a ULIP.

  Endowment plans do not provide information about the investment portfolio. However, the maturity benefit is a guaranteed return, so policyholders know what to expect.

• Withdrawals

  Policyholders can partially withdraw funds from their collected ULIP corpus in financial emergencies. The withdrawals are tax-free and help provide liquidity in times of need.

  Policyholders face restrictions and penalties when they withdraw funds from endowment plans.

Benefits of Investing in a ULIP

When you want high returns to help you meet long-term financial goals, ULIPs might be a good option. Let's see how you benefit when you invest in a ULIP.

• Flexibility

  ULIPs offer investment flexibility. You can choose which funds to invest in based on your financial goals and personal risk appetite. You can also select the sum assured amount based on your family's financial requirements.

• Tax Benefits

  ULIPs offer multiple tax benefits. The investment amount, partial withdrawals, maturity benefit and sum assured payout all enjoy tax deductions and exemptions under various sections of the Income Tax Act of 1961.

• Long-Term Investments

  ULIPs have a lock-in period of five years, making them ideal for long-term investment goals. Over time, it helps you develop a disciplined approach to saving and investing, which can improve your overall financial health.

• Transparency

  ULIP investors can track their fund performance and change the investment allocation to maximise returns. These plans provide complete transparency.

ULIPs are a good investment option if you want market-linked returns, transparency and flexibility. Before selecting a ULIP, ensure you list your financial goals and assign each a timeline. Evaluate your risk appetite and choose funds accordingly. Once you know what you're working towards, you can use your ULIP investment to help you meet your goals.

Related Article

• How to Choose the Best ULIP Plan in India?
• All You Need to Know About Insurance Types, Portability & Its Benefits
• Absolute Returns in ULIPs: Everything You Need to Know

ARN - MC/04/23/1733