ULIP and Endowment

Table of Content

1. What Is a ULIP?

2. What Is an Endowment Plan?

3. ULIP and Endowment Plan

4. Benefits of ULIP

5. Benefits of an Endowment Plan

6. Choosing the Right Fit Between ULIP and  Endowment

7. Frequently Asked Questions (FAQs) on ULIP and Endowment Plan

What is ULIP?

A Unit Linked Insurance Plan (ULIP) is a life insurance product that even assists you in investing for long-term growth. Your premium is split into two portions. One part provides life cover. The other one is invested in market-associated funds. You can select from equity, debt or hybrid fund options based on your risk comfort level.

ULIP plans even permit you to switch between such funds whenever required. This gives you the flexibility to adapt as markets move up and down or as your life goals evolve. Given that market performance determines returns, mid- to high-risk investors seeking growth are best suited for ULIPs. This makes them a practically prudent option for those who want financial protection and wealth-building potential.

Union Budget 2025 has clarified that ULIPs whose proceeds do not qualify for exemption under Section 10(10D) the Income Tax Act, 1961 subject to conditions prescribed will be treated as capital assets. In such scenarios, tax treatment will follow the rules and regulations applicable to equity-associated funds, and any profits on redemption will be looked upon as capital gains.

As the Income Tax Department's FAQs note, when the conditions of Section 10(10D) of the Income Tax Act, 1961 are not met, the amount that you receive might be taxed as capital gains for ULIPs or as income from other sources for non-ULIP policies.

What is an Endowment Plan?

An endowment policy is a traditional life insurance policy that combines protection with guaranteed savings in a single structure. It offers fixed maturity benefits that remain unchanged, irrespective of the performance of the market. With periodic premium payments, the plan builds a habit of disciplined saving, which makes it easier to work toward financial goals over the long term.

Because the returns are stable and predictable, endowment plans appeal mainly to conservative investors who value security over market-associated growth. Their steady payouts make them a suitable option for future requirements, i.e., children's higher education, retirement planning or any goal that requires assured/guaranteed financial support.

ULIP and  Endowment Plan

ULIPs and Endowment Plans differ in how they club insurance with savings or investments. ULIPs concentrate on market-associated growth and offer flexibility to switch funds. However, Endowment Plans prioritise stability through assured returns.

The comparison below makes it easier to understand how each option works across key financial parameters.

Comparison Table: ULIP and  Endowment Plan

This table clearly brings out the difference between a ULIP and an endowment plan, helping readers identify which option better aligns with their goals​, market-linked wealth creation or guaranteed savings.

Benefits of ULIP

ULIPs bring together protection and growth as well as investment flexibility. This makes them a prudent choice for those who want to build wealth while remaining insured.

Market-Linked Returns

ULIPs invest your funds in equity, debt or balanced funds. This enables you to benefit from market performance over a long time period. Such an exposure offers the chance for higher growth over the long term, particularly for those investing for a span of ten years or more.

With compounding at work and regular Net Asset Value (NAV) disclosures, you have complete transparency on how your investment is performing. This makes ULIPs best suited for those looking for steady capital appreciation backed by market participation.

Flexibility in Investment Options

One of the main strengths of ULIPs is the potential to switch between equity, debt and hybrid funds whenever you need them. You can make changes to your fund allocation with zero impact on your tax computation. This assists you in balancing out high-return and low-risk assets as your life goals change/evolve.

Such flexibility permits you to make prudent adjustments to your financial strategy as per the market movements/personal priorities. With easy fund switch options, ULIPs support active and adaptable wealth management options.

Goal-Oriented Investing

​ULIPs are built to support goals that require long-term investment time frames for meeting purposes, i.e., retirement planning or financing your child's higher education. You can select your premium and policy term to match your financial objectives, creating a disciplined savings pattern.

The structure encourages you to remain invested for longer time periods. This assists you in fulfilling essential life milestones with total confidence. Periodic performance updates even make it simple for you to track how your investment is moving toward your goals.

Insurance Coverage

ULIPs offer the dual advantage of insurance and investment under a single plan. On the occasion of the policyholder’s demise, the nominee gets either the sum assured or the fund value, whichever is higher.

This ensures your family remains financially safeguarded while your investment continues to grow. For the ones who want security and market-associated growth, ULIPs provide a balanced and long-term solution.

Tax Benefits

Premiums paid for ULIPs qualify for tax deductions under Section 80C¹ upto overall ceiling limit of ₹1.5 lakh per financial year subject to the conditions prescribed, and the maturity amount may also be tax-free under Section 10(10D)¹, subject to the applicable conditions that includes the aggregate premium threshold of ₹2.5 lakh for policies issued on or after 1 February 2021 and the premium should not exceed the 10% of the sum-assured. These benefits help lower your tax burden while you build long-term wealth.

Fund switches within the plan are even tax-free¹. This makes ULIPs efficient for both an investment and a tax-planning standpoint. This combination supports disciplined investing with added tax benefits.

Flexibility to Add Riders

ULIPs permit you to enhance your protection by adding riders, i.e., accidental death or critical illness cover. Such add-ons extend your policy benefits with zero need for a new insurance plan. They endow broader financial security at a relatively low add-on cost.

With the option to customise your cover, ULIPs easily adapt to changing life phases and health requirements.

Liquidity Options

Post the mandatory lock-in of five years, ULIPs endow partial withdrawal options that give you access to funds when required, subject to applicable terms and conditions. . This feature assists you in managing your financial emergencies or any major expenditures without surrendering the policy.

It maintains your investment goals, having long-term investment horizons, while offering flexible cash access when required. By balancing out liquidity and growth, ULIPs support immediate and future financial needs in an effective way.

Benefits of an Endowment Plan

Endowment plans are known for their low-risk approach. They endow steady growth plus assured protection for long-term financial stability. Their predictable nature makes them best suited for those who prefer security over market-associated fluctuations. Some of the essential benefits of an endowment policy are:

Guaranteed Returns

Endowment plans provide fixed maturity benefits that remain unchanged irrespective of market fluctuations. This eliminates uncertainty and endows you with financial assurance throughout the term of the policy.

The steady growth makes such plans a reliable option for conservative investors who prioritise stability. With predictable outcomes, planning long-term goals becomes clearer and more manageable.

Dual Purpose of Insurance and Savings

An endowment plan offers the benefit of life cover alongside systematic savings in a single policy. It builds a secure financial cushion for your family members while creating a corpus over the long-term period for future requirements.

The guaranteed payouts clubbed with insurance benefits strike a perfect balance between protection and wealth creation. This makes the plan a prudent support system for total financial security.

Disciplined Savings

With regular premium payments, endowment plans naturally encourage consistent saving habits. This structure assists individuals, particularly salaried ones, to plan out their finances with discipline and intent. Over a long time period, it supports attaining fixed financial goals without interruptions. The plan instils accountability as well as fosters financial responsibility over the long-term period.

Financial Planning for Milestones

Endowment plans are best suited for essential life goals, i.e., children’s higher education, marriage or other long-term commitments. Their predictable returns make planning for such milestones straightforward and reliable.

As the corpus grows steadily, it ensures funds are available when essential life stages arrive. This assists you in moving toward crucial achievements with confidence.

Maturity Benefit

Towards the end of the policy term, endowment plans provide a lump-sum payout. This payout can be utilised for fulfilling your planned goals. This amount might even include bonuses declared by the insurer, which enhances the final value.

The certainty of maturity benefits endows mental peace and supports financial readiness over the long-term period. It serves as a dependable source of future funds when you require them the most.

Tax Benefits

Premiums that are paid toward an endowment plan qualify for tax deductions as per Section 80C¹ upto overall limit of ₹1.5 lakh per financial year Plus, the maturity amount might be tax-free as per Section 10(10D) ¹, subject to conditions that includes the aggregate premium threshold of ₹5 lakh for policies issued on or after 1^st April 2023 and the premium should not exceed the 10% of the sum-assured. .

Such advantages encourage savings while minimising your taxable income. With tax efficiency and insurance protection clubbed, endowment plans become an attractive option for long-term financial planning.

Choosing the Right Fit Between ULIP and  Endowment

Zeroing in on between a ULIP and an Endowment Plan becomes simpler when you follow a simple three-step approach. Begin by figuring out your financial goal, whether it is wealth creation, savings over the long-term period or for future security.

Next, examine your comfort level with risk. In case you are open to market-associated returns and can manage fluctuations over the short term in exchange for higher growth over the long-term period, then ULIPs may work well. Endowment Plans are well-suited if you prefer safety-first savings with predictable outcomes and assured maturity benefits.

Finally, match your choice with your investment time frames, as both plans require you to make a long-term commitment for meaningful outcomes. The correct decision must be based entirely on your goals and risk tolerance level; neither option is universally better for everyone.

Frequently Asked Questions (FAQs) on ULIP and Endowment Plan

What is the main difference between ULIP and an Endowment Plan?

The difference depends on how every plan aims to grow your investible. A ULIP invests in market-associated funds, which gives you growth potential along with life cover. An Endowment Plan offers assured savings and insurance but does not take part in the market. ULIPs concentrate on flexibility and returns. However, endowment plans emphasise stability and predictability.

Which gives better returns, ULIP or Endowment?

ULIPs generally offer higher return potential because they invest in equity, debt, or hybrid funds that grow with the market. Endowment Plans provide steady and fixed returns that do not fluctuate. If you are looking for capital appreciation over the long-term period, ULIPs might deliver better outcomes, while Endowment Plans suit those who prefer assured and low-risk earnings.

Are ULIPs riskier compared to Endowment Plans?

Yes. ULIPs hold a higher risk, as their performance is based on market movements. Returns can rise or fall based on fund performance. Endowment Plans involve minimal risk, as they offer assured savings plus fixed maturity benefits. The choice between the two must depend on whether you prioritise growth or stability features.

Which is better for long-term goals, ULIP or Endowment?

ULIPs usually work well for goals having long-term investment time frames, i.e., retirement or wealth creation, owing to their market-associated growth and flexibility. Endowment Plans are best matched for life goals requiring stable and predictable outcomes, such as kids’ future expenditures or risk-free savings. Both of them can support planning over the long term, based on your risk appetite level.

How are ULIP and Endowment Plan returns taxed?

Both ULIPs and Endowment Plans offer tax deductions as per Section 80C¹. For maturity benefits, ULIPs might qualify for tax exemption as per Section 10(10D)¹ of the Income Tax Act, 1961 if particular conditions are met. Endowment Plans even offer tax-free maturity as per Section 10(10D)¹ of the Income Tax Act, 1961, which makes both options beneficial for tax-efficient planning.

 Can I switch funds or withdraw money in a ULIP?

Yes. ULIPs offer flexibility to make the switch between equity, debt and hybrid funds, depending on market conditions or goals, subject to applicable terms and conditions. Partial withdrawals are even permitted post the mandatory lock-in of five years. This gives you investment control while still keeping your long-term plan active.

Note: If assessee has opted for Old tax regime, then assessee shall be eligible to claim deduction under chapter VI-A (like Sections 80C, 80D, 80CCC, etc) of the Income Tax Act, 1961. If assessee has opted for New tax regime then only few deductions under Chapter VI-A such as Sections 80JJAA, 80CCD(2), 80CCH(2) of the Income Tax Act, 1961 are available.