We love to have an assortment of choices to select from, and whether we get it in other aspects of life, when it comes to investments, these choices are endless. However, not having the right guidance for making investments can be a matter of concern.
One of the most pressing questions when it comes to making investments is – how to save for retirement? And the answer to this question is a straightforward one – invest in savings and investment plans – which are either market-linked or guaranteed returns plans.
Savings and investment plans offer a maturity benefit upon the completion of the policy term. While there are several plans available in India, endowment plans or guaranteed returns investment plan in India and ULIPs are generally preferred for each of their distinctive benefits.
If safety is a priority with investment, both ULIPs and endowment plans are a safe investment option. As both these financial offerings promise guaranteed returns, the lines of distinction often seem blurred to the novice investor.
What are ULIPs?
Unit Linked Insurance Plan (ULIP) combines insurance with investment. Just as for term insurance, the policyholder is expected to pay a premium amount towards their ULIP policy. A part of the premium goes towards life insurance, whereas the other part is invested in market-linked returns.
The investments are looked after by fund managers so that the investors don’t have to undertake the hassle. ULIPs are sensitive to the risk preference of the investor, and the policyholder gets to choose whether to invest in equities, debts, or hybrid funds. During the tenure of the ULIP, which usually 10 to 15 years, the policyholder can switch between funds.
To encourage the habit of consistent savings, ULIPs come with a five-year lock-in period during which the funds can neither be withdrawn nor liquidated. At the end of the policy tenure, the policyholder is paid a maturity benefit that can be used as a retirement corpus, or for funding your child’s education, or for any reason the investor deems suitable.
If the policyholder dies during the policy tenure, the nominees are paid the death benefit under the ULIP life cover. Owing to the promise of the maturity benefit and the tax-saving benefits, ULIPs have become amongst the loved insurance-cum-investment plans in India.
Why Invest in ULIPs?
Aside from offering market-linked maturity returns, the following are the additional reasons that make ULIPs a great investment decision:
· Flexibility: ULIPs are amongst the most flexible market-linked investment options. ULIPs help investors change their path if they think that their investments are not gaining the expected returns. With ULIPs, one can:
o Switch between investment funds such as equity, debt, or hybrid based on preference
o Make partial withdrawal to address financial contingencies after the five-year lock-in period
o Make additions through the available top-up options
· Higher Investment Returns: Returns are an important element of making investments. As ULIPs allow the option to switch between funds, you can choose when to invest more in equity funds for higher returns.
· Dual Benefit: ULIPs combine insurance with investment. Its life cover payout offers financial security to the family, and the investment options enable wealth creation for the future.
· Add-ons: The insurance plan for ULIPs can be strengthened with riders such as accidental death, term riders, or critical illness rider by paying a nominal additional premium amount.
What are Endowment Plans?
A type of guaranteed plans, endowment plans offer the dual benefit of insurance with assured returns. Savings are an important element in endowment plans. The insurance component in an endowment plan promises death benefit if the policyholder were to pass away while the policy was still active. However, if the investor survives the tenure, they are eligible for not only the maturity amount but also the bonus accrued on the policy.
Endowment plans are among the traditional guaranteed returns plans in India. They can be classified into two categories: with profit and without profit. Several variations within these classes are catered to address the financial needs of individuals ranging from children’s higher education and marriage to retirement planning and life insurance.
Why Invest in Endowment Plans?
As a guaranteed return plan, an endowment policy is a safe investment option. Following are the reasons why you must invest in an endowment plan:
· Guaranteed Return Plan: Endowment policies promise returns whether they are on maturity, survival, or demise of the policyholder. The returns are oblivious of the market performance and help you with savings.
· Bonus: Aside from the maturity benefit, endowment plans accrue bonuses in the form of the profits garnered by the insurance company. Over the investment tenure, the policy garners Simple Revisionary Bonus and Terminal Bonus.
· Long-term Financial Goals: As it is a guaranteed return investment plan, the returns come with a commitment to long-term investments.
· Tax Benefits: Endowment plans are a tax-saving investment. They are eligible for tax benefits under Sections 80C for the premiums paid and Section 10(10D) for the maturity benefits, life cover and other payouts.
Difference Between ULIPs and Endowment Plans
As both ULIPs and endowment plans offer saving and insurance components, it can get difficult to distinguish the two. For ease of comparison, we have outlined their differences in the following table:
Five-year lock-in period
Lock-in depends on the chosen plan and term of premium payment
A policyholder can choose to invest in equity, debt, or hybrid funds
The policyholder does not make investment decisions
The maturity benefit relies on the prevalent market conditions
Maturity benefit is non-market-linked and includes sum assured and the accrued bonuses
The funds can be switched as per preferences
No changes can be made to the policyYou do not control the funds and avenues where the money is invested.
Withdrawals are available after the five-year lock-in period
The withdrawals are restricted, and penalties are levied upon them
The returns depend on market conditions
The returns are a guaranteed amount
cChoosing between ULIPs and endowment plans depends on financial expectations. While ULIPs garner higher returns, an endowment policy is a safer guaranteed plan.
The Edelweiss GCAP plan is a guaranteed returns insurance plan by Edelweiss Tokio Life that transforms dreams into realities by promising guaranteed returns along with a life cover. It is an affordable endowment plan with the flexibility to choose the policy term and the premium.
You can also check out Unit Linked Insurance Plans from Edelweiss Tokio Life. Get market-linked wealth creation and enjoy unlimited, free-of-cost fund switches for investments that match your needs and risk appetite.
For more details, get in touch with us today.
Chirag Iyer - BFSI Enthusiast
Chirag is a writer and an avid reader who loves to drink coffee! His other interests include boxing, karate, and singing.