Difference Between Linked And Non-Linked Life Insurance Plans

Non-linked insurance plans are traditional insurance plans that only aim to offer comprehensive financial protection to your family in case of your unfortunate demise during the policy tenure. These insurance plans are not linked to the market, and hence, their returns are not based on how the market performs. Non-linked insurance plans are low-risk plans that offer low returns and a well-defined death or maturity benefit. Some of these insurance policies give out guaranteed returns, including bonuses and loyalty payouts.

Linked insurance policies are often referred to as insurance-cum-investment plans. These policies are linked to the stock market, and their returns are based on how the market performs. In such plans, a part of the premiums you pay for your policy is used to provide you with a secure insurance cover. The remainder of the premiums is invested in the market, in funds of your choice and as per your risk tolerance, investment horizon and financial objective.

How Do Linked Insurance Plans Differ From Non-linked Insurance Plans?

Here are some of the main differences between non-linked and linked insurance plans:

• Investment Flexibility

Linked insurance policies like the ULIP plan offer more flexibility in terms of investment. You have the option to invest in funds that best match your risk appetite, investment horizon and financial goals. So, if you are a risk-taker, you can choose to invest in equity-based funds that come at high risk but also allow you to earn higher returns. Alternatively, non-linked insurance plans do not allow you to choose your investments. Your funds are invested at the insurer’s discretion. 

• Maturity Benefit

In the case of linked insurance policies like a ULIP plan, the units you buy at the time of ULIP policy purchase are given to you at maturity on the then market value. In addition, ULIP plans give you yearly bonuses2 and loyalty additions at maturity. However, non-linked insurance plans pre-define your sum assured as well as guaranteed returns at the time of policy purchase.

• Transparency

Your investment in linked plans like a ULIP policy is more transparent as compared to non-linked insurance plans. You choose your investments as per your preference and can monitor your portfolio regularly. Also, the insurance company sends you regular updates on your units and on the premiums you invest. Inversely, non-linked insurance plans have no investment component, and hence, you have no clarity on how your money is invested.

• Partial Withdrawals

Linked plans such as ULIP plans give you the option to withdraw from your funds partially. You can use this facility when you need cash in case of an emergency. However, even ULIP plans come with withdrawal limits, which differ from one insurer to another. Alternatively, for non-linked insurance plans, you have no option to make a partial withdrawal; if you need funds, you will have to surrender your policy. The loan facility is also available in non linked plans. 

• Switching Options

Linked insurance plans like Unit Linked Insurance Plans give you the option to switch your funds as per your changing preference over time. Most companies do not levy any ULIP charges for switching funds. For instance, if you invest in equity-based funds and then want to shift to a low-risk fund such as debt, you can do it easily in a ULIP plan without any ULIP charges. But this option is not available with a non-linked insurance plan.

 Conclusion

The choice between non-linked insurance plans and linked insurance policies depends on your individual preference. If you are a risk-averse investor, you can choose to invest in a non-linked insurance plan. However, if you want high returns and can afford to take the risk, you should pitch for linked plans like Unit Linked Insurance Plans.

Also Read: 

What is the Best Age to Buy a Term Insurance Plan?    

Common Terms And Conditions Under A Life Insurance

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.