This or that: Ulip versus traditional insurance policy

Do you want an insurance policy that also gives some return on your money? Broadly, there are two types of insurance plans in the market that allow investments: unit-linked insurance plans (Ulips) and traditional plans. Mint explains the features of both.

ASSURED RETURNS:

Ulips are market-linked plans, so they don’t guarantee returns, however some plans can work like capital protection plans, in which they offer a minimum guarantee to protect the capital and for this they levy an extra charge. Traditional plans either offer a minimum investment guarantee or guarantee the entire investment amount upfront.

Ulips: bad

Traditional plan: good

TRANSPARENCY:

Ulips are transparent products that disclose costs as well as where the money is invested. Traditional plans neither disclose costs nor the investment portfolio. Where the entire investment benefit is guaranteed, the policy defines the benefit in absolute amount. Where only a minimum amount is guaranteed, additional returns are pegged to annual bonuses.

Ulips: good

Traditional plan: bad

COST:

Ulips disclose costs in the policy brochures. You can see how it affects your investments through a benefit illustration. It shows you how your funds perform net of costs year-on-year, assuming 4% and 8% return. The costs in Ulips are capped. For traditional plans, the costs are not disclosed. They have to be estimated using the benefit illustration.

Ulip: good

Traditional plan: bad

SURRENDER CHARGE:

Ulips have a 5-year lock-in period. If you surrender a policy in the first 4 years, a charge of up to Rs6,000 is levied in the first year and it tapers to Rs2,000 if you surrender in the fourth year. After 4 years, there is no charge. For a traditional plan, the charge is 100% in the initial 2-3 years. It tapers as you come close to maturity, but is much higher than in Ulips.

Ulip: good

Traditional plan: bad