Insurance is a legal agreement entered into between an individual & an insurance company. Under this agreement, the policyholder is required to make a payment towards the premium to the insurance company. In exchange for the premium amount, an insurance company offers financial coverage to the family members of the policyholder in case they die. The insurer here is the insurance company, which accepts risk & is considered to pay for losses happening at any time during the policy tenure against the amount of premium paid.
As there are many insurance plans available in the market, it becomes important to select an appropriate one. This decision depends upon the future financial obligations, financial objectives, budget, etc. The two most important factors that further categorise the insurance plans into two different arenas are linked & non-linked plans. After understanding What is Insurance, let us understand the meaning of the two.
What is Linked Insurance?
These plans are also known as Unit Linked Insurance Plans, i.e. ULIPs, which provide a dual benefit of insurance & investments. Under this plan, a part of the premium is allocated towards insurance & the remaining towards market-related securities, such as debt, equities, or both. This plan provides the benefits of both wealth accumulation & life coverage.
What is Non-Linked Insurance?
These are traditional Life Insurance offering financial security without being linked to the market. As they are not linked to the market, they provide guaranteed returns, providing a secure financial future to the family members of the policyholder.
Difference Between Linked & Non-Linked Insurance
Provided are the differences between the linked & non-linked insurance plans:
| Basis of Difference | Linked Insurance Plans | Non-Linked Insurance Plans |
| Meaning | This plan offers returns depending on the performance of the market. | The returns offered by this plan are not dependent on the performance of the market. |
| Returns | These plans offer high but not assured returns as they are linked to the performance of the market. | These plans may offer lesser returns, but offer assured returns as their performance is not market-linked. |
| Investment flexibility | This plan provides flexibility in terms of investment, i.e. debt, equity, or both, depending on the financial objectives, risk tolerance level, & convenience. | This plan provides less flexibility as the choice of financial instrument in which funds are to be invested remains with the insurance company. |
| Transparency | These plans are more transparent as they allow you to choose the funds in which investment is to be made, with further tracking. | These plans offer less transparency as everything is managed by the insurance company. |
| Risk | The risk under these plans is on the higher side as they are market-linked. | These plans offer fewer risks. |
| Lock-in period | They come with a lock-in period of 5 years. | This plan ends by the end of the policy duration or the death of the policyholder, whichever is earlier. |
| Bonus | As they are non-participating, there is no bonus payable. | They are participating in nature, hence a bonus is payable. |
| Partial Withdrawal | It allows partial withdrawal of funds once the lock-in period is over. | This plan does not allow partial withdrawal of funds; rather, you have to surrender your plan. But there are certain plans which include a bonus component, due to which partial withdrawal is allowed. |
| Switching options | This plan allows switching between the funds. | Not available |
| Maturity benefit | It allows for redeeming the fund value on the maturity date, depending on the market value on that date. | This plan pays you depending on the rate determined at the time of purchase of the plan. |
Benefits of Linked Insurance Plans
Provided are the benefits of linked insurance plans:
- Investment Flexibility
Under this plan, policyholders are provided with an option to choose the investment plans that best align with their financial objectives & risk tolerance level. These investments include debts, equity, or balanced funds, etc., which further allows flexibility to switch between the funds if you think some other plans are offering better returns.
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Market-Linked Returns
Under this plan, the performance of the funds depends on the market situation, depending on which returns are offered. These plans include higher returns along with increased risks.
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Transparency
These plans are transparent in nature in terms of performance of funds, allocation of funds, associated charges, etc. This is because it provides regular updates to allow policyholders to manage & review the funds periodically.
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Partial Withdrawals
Once a lock-in period of 5 years has been met, this plan allows partial withdrawal of funds, hence providing liquidity to meet financial emergencies.
Benefits of Non-Linked Insurance Plans
Provided are the benefits of non-linked insurance plans:
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Guaranteed Returns:
These plans offer assured returns in terms of maturity proceeds or death benefits, irrespective of the market situation.
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Low Risk:
These plans offer lower risks as they are not linked to the market, making them suitable for risk-averse individuals.
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Fixed Premiums:
Under these plans, the premium amount remains fixed throughout the policy tenure, helping in financial planning.
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Limited Investment Flexibility:
Under this plan, the portfolio is being managed by the insurance company, leaving no option for the policyholders to switch between the funds.
Which One to Choose – Linked or Non-Linked Insurance
Selecting a plan depends on financial objectives, risk acceptance level, financial strategies, etc.
A. Choose the Linked Insurance Plan if:
- You are looking for both life insurance & wealth creation.
- You have a long-term investment horizon.
- You are ready to face risks associated with market-linked securities.
- You are looking for flexibility to switch between the funds.
B. hoose the Non-Linked Insurance Plan if:
- You are looking for financial security irrespective of wealth creation.
- You are looking for assured returns & limited risk.
- You don’t want to invest in market-related investments.
Conclusion
There is no single plan crafted for all individuals; the main choice depends on the individual’s budget, financial objectives, and risk tolerance level. To conclude, if an individual is comfortable with market fluctuations & looking for high returns, opt for a linked plan. On the contrary, if an individual is looking for assured returns with lesser risk, opt for non-linked insurance plans.