In today’s day and age, the world realises how fragile human life is and how a robust insurance cover is a necessity. Thus, considering the right life insurance cover is one of the steps in successfully planning for dependents and ensuring a financial safety net for their future. With a life insurance plan, a secure financial backup is available for all members dependent upon you. Be it for education, marriage or even basic survival, all of it can be managed with the right insurance policy.
Among the plethora of policies that are available, choosing the right insurance plan can often get confusing. It can, at times, become a daunting experience. Therefore, it is important to have the right information to make the right choice of plan.
Linked and non-linked are two parameters based on which insurance plans can be classified. Let’s look at how these two categories differ.
What are non-linked insurance policies?
Insurance policies that offer only insurance coverage or even provide returns at the end of its tenure that aren’t linked to the market are classified in this basket of non-linked insurance policies. Traditional insurance plans, like endowment plans, term plans, and whole-life plans are examples of where there is pure insurance coverage and even returns, but with no linkage to the fluctuations of the markets.
These policies aim to provide comprehensive coverage for the family in case of an unfortunate demise of the policyholder during its tenure. Since these policies offer returns that are not linked to market forces, their returns do not vary based on the performance of the market. Consequently, the risk for such policies is very low, and they provide guaranteed returns that include bonus and even loyalty payouts.
However, for term policies, they are non-participating plans. Hence, no bonus or other add-ons are provided; only a fixed insurance cover for the premium paid.
What are linked insurance plans?
Linked insurance plans, unlike non-linked policies, offer dual benefits of insurance and investment. Hence, they are referred to as insurance-cum-investment plans. A part of the premium that is paid is apportioned towards providing insurance coverage, while the balance is apportioned towards investment in market-linked securities. Hence, the return provided by these policies is directly linked to the market performance. Based on the risk appetite, investment horizon and financial objectives, appropriate investment avenues can be opted for.
A ULIP plan is a prime example of linked insurance policies, where the premiums are divided in to two parts — insurance and investment — and invested in either equity- or debt-based funds. The risk for the investment component of a ULIP plan is higher owing to the market volatility.
Further, for all ULIPs, a lock-in period is applicable where any surrender is possible only after five years. This period was three years earlier. After the ULIP lock-in period, you can choose to withdraw the funds, complete or partial, and even discontinue thereafter.
How do linked plans differ from non-linked plans?
Following are some distinction points based on which differences between a linked and non-linked policy can be drawn.
- Flexibility of investment
A linked insurance policy offers more flexibility, as you, the policyholder, have the option to invest in funds depending on your risk-taking capability, for the time up to which you want to invest according to the associated financial goals. Switching of plans is also allowed to modify your investment as the policy tenure progresses. Comparatively, non-linked plans do not allow you to pick your investment and are invested based on the insurance company’s discretion.
- Benefits at maturity
For linked insurance policies like a ULIP plan, the investment is made in equity or debt fund units which are given at maturity at the then market value. In addition, bonus and loyalty add-ons are also paid. However, they depend on the policy terms, and thus, it is important to know what a ULIP policy is from the start.
- Transparency
The investment made in ULIP plans is more transparent as compared to non-linked policies. You, as a policyholder, get to choose your investment preference and monitor the portfolio regularly.
- Facility for partial withdrawal
Partial withdrawal is another feature that a linked policy like a ULIP offers. In case of an emergency need of funds, you can liquidate a part of your investment to fund the situation. The same is not available for non-linked policies. Before you select a suitable linked policy, understand what a ULIP policy is and how the partial withdrawal works.
- Switching of plans
Finally, ULIPs also allow you to switch your investment plans to modify the investment based on the investment objective, whereas no such benefit is available to a non-linked policy.
The choice of a linked or non-linked policy is an individual preference. Hence, if you are a risk-averse investor and want to seek guaranteed returns, a non-linked policy works. However, to meet your financial goals along with securing your family’s financial security, a linked policy like a ULIP can be suitable.
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