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Sunday, September 26, 2010

Life Insurance: ULIP Vs Endowment Plan

Till some time back, if you wanted to buy insurance, the only option you had was to buy an endowment plan. Of course, there were many different plans, with many different, fancy names. Each had its own table of promised or possible returns. But the bottom line was - they were all endowment plans.

This means that when you wanted to buy insurance, you were forced to also invest at the same time. On this insurance "investment", companies declared "bonuses" every year. No one knew where the money was invested, and you, the policy holder, had no control over it. All you ever knew was the "bonus" declared every year. And since Indians had been "investing" in insurance for a very long time, we started expecting "returns" from our insurance policies as a given.

When the private insurance companies came into the picture, they saw a big opportunity. They made us ask the question - if it is my money that is being invested, should I not have at least some control over it?

And thus, the Unit Linked Insurance Plan (ULIP) was born.

What is a Unit Linked Insurance Plan (ULIP)?

It is a type of insurance, in which your premium amount is divided into two parts.

1.One part, a small fraction of your premium, is used to provide you insurance.
2.The other part, the much larger portion, is used to buy "units" of investment.

The first part (insurance part) depends on the sum insured - the higher the sum insured, the more is the money spent to buy insurance.

The money from the other part (investment part) is invested based on the type of the units - it can be largely in equities, or only in debt, and all the flavours in-between. The value of these units increases depending on the returns these investments provide.

At any time, the sum insured is either the original sum insured that you chose at the time of buying insurance, or the NAV of all your units - whichever is higher.

So, what is the advantage of a ULIP over an endowment plan?

Actually, its Control.

A Unit Linked Insurance Plan (ULIP) provides you much more control over where your money is invested - You decide which kind of units to buy - they can be largely for stocks, for debt, or a combination of both.

Also, you can switch between different units - usually a couple of times a year, depending on your insurance company. This means that depending on your analysis, you can move from stocks to debt to a hybrid investment - whichever way you want.

This compares very favourably to endowment plans, where you have absolutely no control over where your money is invested.

Another big advantage of ULIPs is that after a couple of years of buying the plan, even if you are unable to pay the premiums, the insurance cover continues. When you don't pay the premium, the insurance company sells some units to get an amount so that it can continue to provide the life cover for you.

So, that is the comparison between ULIPs and Endowment plans, and ULIPs are definitely a better choice when compared to Endowment Plans. No wonder they are so popular!!