Difference Between a ULIP Plan and an Income Plan

Over the years, as the insurance needs of the people have evolved, insurance companies introduced many unique and innovative insurance products. Today, many people look for insurance plans that offer the benefits of savings and investment, apart from insurance protection under a single plan. ULIPs (Unit Linked Insurance Plans) and Guaranteed Income Plans are two popular insurance products that serve this purpose.

ULIPs give you the chance to invest in the money-market instruments and provide valuable market-linked returns in the long run, along with financial protection to your family. In contrast, income plans are quite popular among insurance buyers in India as they offer regular income on their investment and life insurance coverage.

If you are a first-time insurance buyer and feel confused about which is better ULIP or Income Plan, then understanding the differences would help you make the right choice.

What is it?

ULIP is a type of life insurance policy where a part of the premium you pay for the policy is invested in different assets like government bonds, stocks, and equity and debt mutual funds as per your risk-taking capacity and long-term financial goals. The remaining amount is used for offering life insurance protection.

An income plan is a type of life insurance policy that provides guaranteed returns on the investment in the form of a regular monthly payout and, at the same time, secures your family’s financial future against uncertainties of life.

Risk involved

Since ULIPs give you exposure to the money market, the returns you get greatly depends on the funds’ performance and the market movement. Although there is some risk involved with ULIPs, it provides valuable returns in the long run, and investments in ULIPs are relatively safe.

In contrast, the funds in guaranteed income are invested in non-market-linked avenues. Consequently, you can be assured of getting steady returns, which are fixed at the beginning of the plan.

Lock-in period

The concept of ULIP is based on providing a long-term investment avenue for the investors. It has a mandatory lock-in period of five years, meaning you cannot withdraw funds from the accumulated corpus for five years from the start of the policy.

After the lock-in period is over, you can partially withdraw the funds. The number of times you can withdraw in a year and the maximum amount you can withdraw at once varies from one insurer to another. Thus, ULIPs provide liquidity of funds during emergencies.

In contrast, income plans do not have a lock-in period. But, you must continue to pay the premium until the end of the policy term. After the policy matures, you get regular monthly income for a specific period. However, it does not allow partial withdrawal.

Fund switch option

One of the significant features of ULIP is that it gives you the flexibility to switch your investments from one fund to another as per your changing life goals and risk-taking capacity. This allows you to ride the market volatility and get valuable returns. You can switch your investments in equity funds to debt funds or vice versa. The number of free switches allowed in a year depends on your insurer. Some insurance companies allow unlimited free switches.

In an income plan, the investment avenues for generating guaranteed returns are decided at the beginning of the policy, and there is no provision for changing that.

Transparency

The operations of ULIPs are highly transparent. You get all the necessary information you want related to your investment including the market movement, price value of each unit of the funds, the overall fund value, etc.

On the other hand, when you invest in an income plan, there is no such transparency in the proceedings.

Final Word

Thus, it is quite evident that ULIPs hold a significant advantage over income plans. But, the final decision is your prerogative; you can invest in ULIPs or income plans to suit your needs.

Click here to know more about Unit Linked Insurance Plan.