For many years, traditional or endowment insurance plans has been the investment cum insurance solution for

Indian customers. When unit linked insurance plans were launched with promises of high returns, the trend shifted and people started buying ULIPs. In 2010, when IRDA put a cap on ULIP charges, traditional plans have made a comeback with the insurers promoting them.

Given below is analysis of ULIPs versus traditional plans head to head:

Life Cover: The minimum life cover in most ULIPs is 5 times the annual premium. And in many ULIPs, death benefit is equal to both life cover and fund value. In contrast, in most traditional plans, you get only Sum Assured (and bonuses if any) and life cover could be as low as Rs 50,000. It is true that you can increase the life cover in traditional plan as per your preference but that will also result in increase of premium.

Returns: The returns in Unit linked insurance policy depend on market performance. If you continue policy for longer term, risks are mitigated and you can get good returns. Traditional plans have guaranteed returns which are specified at the beginning of life insurance plans. However the returns are low and not practical as compared to the consistent increase in cost of living.

Charges: ULIP charges were high earlier but there is cap on charges now. New ULIPs are coming with zero allocation charges and also can be bought online which further decreases the cost. In traditional plans, charges are unknown.

Flexibility: ULIPs let you make switches between funds, make premium redirection and even partial withdrawal. Traditional plans do not offer such features. However there is loan feature with many traditional plans which you can apply against. The interest rate for loan will be charged for the same.

Surrender: If you cancel ULIP before 5 years, there will be cancellation charges and the premium will be paid only after lock-in period. For that time duration, it will put in discontinued fund. After the lock-in period of 5 years, you can surrender ULIP without any cancellation charges. The fund value will be paid as per the NAV of the fund. Traditional plans have surrender value after policy has been continued for 3 policy years. The surrender value is higher of special surrender value or guaranteed surrender value. Special surrender value is declared by insurer from time to time and guaranteed surrender value in most traditional plans (regular premium) is equal to 30% of all the basic premiums paid minus first year premium.

Conclusion:

Unit linked insurance plan is for individuals who can manage and shift funds when required and are comfortable around equity based risks. The life cover is good but not enough for securing family members. Traditional plan (Invest n Forget) are for individuals who are unable to manage funds and do not understand the intricacies of unit linked insurance plans. The life cover in traditional plan is not enough and one should always go for term plan for ensuring financial security for family members.

Both traditional and ULIPs should be kept for complete term to reap the benefits.