Feature Comparison: Traditional Vs ULIP Vs FD Traditional Insurance Policy
ULIPs
Bank FDs
Returns
Opaque product; hard to calculate returns and not guaranteed. Policy term of 10 years would fetch return of 2%-5%
Returns from debt ULIPs will be similar to traditional insurance. Equity performance returns will vary with stock market
Tenure of 10 years can fetch 9% and interest rates are guaranteed
Purpose
Insurance+long-term disciplined savings
Insurance+long-term disciplined savings
Savings
Liquidity
Illiquid. Money-back policies offer money at intervals
After 5 years, policy can be surrendered without any charge
FDs can be broken at any time
Flexibility
Opaque product with low flexibility. You are Lot of flexibility. Easy to discontinue after 5 years without any charge stuck with it even if bonus rates are poor
Transparent product with high flexibility
Tax Treatment
Sum assured needs to be 5 times the premium to qualify for full tax benefit
Sum assured needs to be 5 times the premium to qualify for full tax benefit
Some tax exemption is given on interest received
Commission
High commission; front-loaded and throughout the policy term
Commission spread over the years. Cumulative charges are high
No commission
Surrender Value
Guaranteed surrender value is low. Low surrender value is deterrent for policy surrender
Surrender charges within 5 years capped at Rs6,000. Discontinued funds get 4% return, but paid after five-year lock-in. No charges for surrender after the lock-in
Penalty usually is 1% less than the rate for the period FD was kept
Loan
Loan of up to 90% of the surrender value @ 9% interest (current LIC rate)
Loan of up to 30%-40% of the surrender value @ 9% interest (current LIC rate). Exposure to equity restricts the loan value
Loan can be availed up to 90% of the FD value @ 1% or 2% higher interest rate than the FD interest rate
Entity Risk
Insurers are mandated to have capital and Insurers are mandated to have capital and Government-owned banks, many assets of at least 1.5 times the insured private sector banks and some assets of at least 1.5 times the insured liabilities. Low risk of entity default cooperative banks are safe liabilities. Low risk of entity default
Source: Moneylife research