Is ULIP Better Than Endowment?

The government suggested in the recently passed Budget 2021 to include proceeds from ULIPs purchased on or after February 1, 2021, in the tax ambit if the annual premiums surpass Rs.2.5 lakh. So, depending on whether tax savings or risk coverage are more important to you, this Budget statement may have an impact on your insurance product selection in the near future. The point is, how can you determine which form of life insurance product is suitable for you after Budget 2021? To discover out, let's look at the characteristics and benefits of three popular insurance packages.

Traditional insurance policies, such as endowment plans, are devices for reducing insurance costs. They combine savings with a low-cost life insurance policy. Endowment plans might be ULIPs or non-ULIPs. Endowment plans come in a variety of forms. Endowment insurance normally provides a bare-minimum assured amount at maturity, and the premiums you pay are eligible for a tax deduction of up to Rs.1.5 lakh under Section 80C of the Income Tax Act.

Because ULIPs are market-linked vehicles, they have a higher potential for wealth growth than typical insurance plans. ULIPs give you the freedom to choose between debt and equity asset types. They also provide for Section 80C tax deductions. ULIPs have a five-year lock-in period. Prior to Budget 2021, ULIP revenues that did not exceed 10% of the sum assured under Section 10(D) were tax-free.

Are ULIPs Better Than Endowment Plans?

Below are a few comparisons between ULIP and Endowment plans:

1. Withdrawal Option

There is a cost for prematurely withdrawing from an endowment plan.

In the event of an emergency, ULIPs allow the investor to withdraw funds from the account. 

However, in other cases, the policy specifies that the life assured must be at least 18 years old before withdrawals can be made.

2. Investment Type

An endowment plan is a sort of ordinary life insurance that pays out both on death and on maturity. Accidental death and disability are also possible outcomes.

A ULIP is a type of insurance that combines life insurance with the ability of the policyholder to accumulate wealth. Under the terms of this plan, a portion of your contribution will be set aside for life insurance, and the remainder will be invested in the stock market.

3. Returns

Because the profitability of ULIPs is based on the performance of the capital market, they can be far more expensive than endowment plans, especially if you invest in an equity fund. As a result, investing for a longer length of time will yield higher returns. Endowment policies, on the other hand, can guarantee guaranteed returns at death and maturity and are not affected by market fluctuations.

4. Transparency

There are no facilities for transparency to the investors due to the lack of an investment portfolio. In comparison to other insurance policies, ULIPs are seen as easy and uncomplicated. ULIPs will assist you in becoming familiar with your investment funds and in allocating your funds throughout the plan. Because they are directly linked to the market and are more sensitive to risk, ULIPs ensure transparency in front of the policyholder.

5. Wealth Generation Goal

Investing in ULIPs can help you build long-term wealth. Compounding also plays a part in this case. Compounding helps you establish a large portfolio if you stay invested for a long time. The ULIP NAV at maturity will decide the amount. The corpus can help you prepare for financial goals such as retirement, higher education, and the weddings of your children. When it comes to endowment plans, you only get the guaranteed maturity benefit and any extras that may be available. As a result, ULIP returns outperform endowment policies.

Conclusion

Keeping your insurance and financial requirements separate is a good idea. As a result, a term plan is ideal for anyone looking to get a life insurance policy with a sufficient amount of coverage. According to your financial goals, risk appetite, and liquidity requirements, you can invest in a variety of instruments across numerous products and asset classes.

If you're a risk-averse investor trying to save money on taxes, a combination of a term plan and provident fund investments like PPF, which give better returns than typical insurance plans, can be worth considering. A combination of a term plan and a tax-efficient ELSS mutual fund is a good option if you wish to take risks.

You may also like to read - How To Buy ULIPs Online?

Disclaimer: This article is issued in the general public interest and meant for general information purposes only. Readers are advised not to rely on the contents of the article as conclusive in nature and should research further or consult an expert in this regard.