Difference Between Linked and Non-Linked Insurance Plans
Today, more than ever, the world has realised the fragility of human life and how a good insurance policy is a necessity than a choice. Even though it is not possible to put a monetary value on life, it is important to associate one because of the very people that make your life unmeasurably good. So, for the sake of the people you love and those who depend on you for your needs, you must invest in a comprehensive insurance policy.
With so many different types of insurance plans available in the market, choosing the right insurance policy becomes quite daunting. However, as mentioned, it is important to choose a plan that fits your need, offers the right features and fits your budget appropriately.
Two of the most substantial parameters that categorise insurance policies in two separate baskets are – linked and non-linked insurance plans. Linked insurance policies are the insurance plans that offer an insurance cover along with returns as dependent on the performance of the market. The most popular example of a linked insurance plan is Unit Linked Insurance Plan or ULIP plan. Alternatively, non-linked insurance plans are traditional insurance plans that either offers only insurance coverage or provide insurance coverage along with guaranteed1 returns that are not linked to the movement in the market forces.
Here is everything you need to know about the differences between linked and non-linked insurance plans:
What is a non-linked insurance policy?
Non-linked insurance plans are traditional insurance plan that only aims to offer comprehensive financial protection to your family in case of your unfortunate demise during the policy tenure. These insurance plans are not linked to the market, and hence, their returns are not based on how the market performs. Non-linked insurance plans are low-risk plans that offer low returns and a well-defined death or maturity benefit. Some of these insurance policies give out guaranteed1 returns, including bonuses2 and loyalty payouts.
Typically, term insurance, a guaranteed1 savings plan, endowment policy, money-back policy and other similar plans are categorised as non-linked insurance plans. However, term plans with return of premium are also non-participating life insurance plans where you do not receive any bonuses2 or add-ons; instead, you only get a fixed insurance cover in return for the premiums you pay.
What is a linked insurance policy?
Linked insurance policies are often referred to as insurance-cum-investment plans. These policies are linked to the stock market, and their returns are based on how the market performs. In such plans, a part of the premiums you pay for your policy is used to provide you with a secure insurance cover. The remainder of the premiums is invested in the market, in funds of your choice and as per your risk tolerance, investment horizon and financial objective.
Linked insurance policy potentially offers high returns but also has a high element of risk, owing to the market volatility. In such policies, you do not participate in the bonus2 and loyalty rewards of the insurance company. However, some linked insurance plans come with bonuses2 and rewards at the insurer’s discretion.
Typically, the ULIP plan or Unit Linked Insurance Plan is the most common type of linked insurance plan.
How do linked insurance plans differ from non-linked insurance plans?
Here are some of the main differences between non-linked and linked insurance plans:
Linked insurance policies like the ULIP plan offer more flexibility in terms of investment. You have the option to invest in funds that best match your risk appetite, investment horizon and financial goals. So, if you are a risk-taker, you can choose to invest in equity-based funds that come at high risk but also allow you to earn higher returns. Alternatively, non-linked insurance plans do not allow you to choose your investments. Your funds are invested at the insurer’s discretion.
In the case of linked insurance policies like a ULIP plan, the units you buy at the time of ULIP policy purchase are given to you at maturity on the then market value. In addition, ULIP plans give you yearly bonuses2 and loyalty additions at maturity. However, non-linked insurance plans pre-define your sum assured as well as guaranteed1 returns at the time of policy purchase.
Your investment in linked plans like a ULIP policy is more transparent as compared to non-linked insurance plans. You choose your investments as per your preference and can monitor your portfolio regularly. Also, the insurance company sends you regular updates on your units and on the premiums you invest. Inversely, non-linked insurance plans have no investment component, and hence, you have no clarity on how your money is invested.
Linked plans such as ULIP plans give you the option to withdraw from your funds partially. You can use this facility when you need cash in case of an emergency. However, even ULIP plans come with withdrawal limits, which differ from one insurer to another. Alternatively, for non-linked insurance plans, you have no option to make a partial withdrawal; if you need funds, you will have to surrender your policy. Loan facility is also available in non linked plans
Linked insurance plans like Unit Linked Insurance Plans give you the option to switch your funds as per your changing preference over time. Most companies do not levy any ULIP charges for switching funds. For instance, if you invest in equity-based funds and then want to shift to a low-risk fund such as debt, you can do it easily in a ULIP plan without any ULIP charges. But this option is not available with a non-linked insurance plan.
The ultimate choice
The choice between non-linked insurance plans and linked insurance policies depends on your individual preference. If you are a risk-averse investor, you can choose to invest in a non-linked insurance plan. However, if you want high returns and can afford to take the risk, you should pitch for linked plans like Unit Linked Insurance Plans.
ULIP plans like the TATA AIA Life Insurance Smart Sampoorna Raksha (UIN -110L156V02) gives you the unbeatable advantage of securing your loved ones against an unfortunate eventuality while also accumulating wealth to secure your dreams. You also get ULIP taxation benefits under this policy.
Life Insurance premiums are *tax-free under Section 80C. The death and maturity benefit offered by the ULIP plan is also free from *taxes under Section 10(10D), subject to some conditions.