Ch. 12: Linked Vs. Non-Linked Insurance Plans

When you are looking to buy life insurance, you will come across several types of products. Two major types of life insurance include linked and non-linked insurance products.

• A linked insurance plan offers an insurance cover as well as allows you to invest your money in several funds of the stock market. The returns you get under this plan depend on the performance of the stock market.
• Under a non-linked life insurance plan, the returns you get are guaranteed. They are not related to the stock market. Some examples of non-linked plans are term insurance, endowment plan, money-back plan, etc.

Please note, some non-linked life insurance plans may not give you any returns when the policy ends. A term insurance plan, for example, will not pay anything back if you outlive the policy term.

In this article, let’s learn in detail about linked and non-linked insurance plans, how they work, and how they differ from one another.

As we read above, a linked insurance plan is a type of insurance plan that is linked to the stock market. The returns you get under these plans depend on the performance of the market.

A Unit Linked Insurance Plan (ULIP) is the most common example of a linked insurance policy.

In ULIPs, a part of the premium you pay is used to provide insurance coverage. The remaining premium amount is invested by the insurance company in funds of your choice, as per your risk tolerance, financial goals, etc. The risk involved in a linked insurance plan is high because of the market volatility. However, due to this high-risk nature, there is a possibility of earning higher returns, too.

Let’s understand how it works with the help of Aashna’s example.

For instance, Aashna buys a ULIP for a duration of 10 years, where she has to pay an annual premium of Rs 50,000. Now, let's assume charges of Rs. 10,000 are applicable on the ULIP. So, Rs. 40,000 is ready to be invested. She decides to invest in Fund A. Let’s assume that the NAV on the day of her purchase was Rs 100.

So, the total units she received = Invested Money / Net Asset Value

= 40000/100
= 400 units.

Say she accumulates another 2100 units from the premiums she invests throughout the duration of 10 years of the policy. So, the total number of units she holds will be 2500 (400 + 2100).

Let’s see how the death and maturity benefit will be paid out under Aashna’s policy.

Death Benefit:

Under a ULIP, the death benefit may be -

• Either the sum assured or the fund value, whichever is higher.
• OR
• The sum assured plus the fund value.

Let’s assume -

• The insurance company will pay the higher of either the sum assured or the fund value as the death benefit under Aashna’s plan.
• The sum assured under Aashna’s plan is 10 times the annual premium.
• The NAV on the day Aashna passes away is Rs. 120.

If Aashna passes away while her policy is active her family will receive the higher of the sum assured or the fund value. Let’s assume she owns 2000 units under the plan before she passes away.

Sum Assured = 10 x Annual Premium
= 10 x 50,000
= Rs 5,00,000

Fund Value = NAV x Number of Units
= 120 x 2000
= Rs. 2,40,000

Sum Assured > Fund Value. So, the insurance company will pay Rs. 5,00,000 to Aashna’s family.

Maturity Benefit:

If Aashna survives the policy term, she will be paid the fund value based on the NAV on the day her policy matures. Let’s assume the NAV is Rs. 120. So, the fund value, i.e., the amount she will get will be -

Fund Value = NAV x Number of Units
= 120 x 2500
= Rs. 3,00,000

So, the insurance company will pay a maturity benefit of Rs 3,00,000 to Aashna.

Non-linked insurance plans are low-risk insurance plans that offer guaranteed returns. They are not linked to the performance of the market. Hence, the returns under these plans do not depend on how the market performs.

Some examples of non-linked insurance policies are endowment plans, money-back policies, term insurance plans, etc.

Under a non-linked insurance plan, the insurance company will pay a predefined death and maturity benefit. Along with this, some policies also offer additional returns in the form of bonuses, dividends, etc.

Please note: Some non-linked life insurance plans may not give you any bonuses or returns at all when the policy ends. For example, a term insurance plan will not offer any payback if you survive till the end of the policy term.

Let’s understand how non-linked insurance plans work with the help of Aditya’s example.

Aditya, 30, buys an Endowment Plan to save for his son’s wedding. He buys a cover of Rs. 25 Lakhs for a period of 30 years. He is required to pay an annual premium of Rs. 20,000. As per his policy T&Cs, he will receive the chosen sum assured at the time of maturity. In case he passes away while the plan is active, his nominee will receive the sum assured at the time of his death.

So -

• If Aditya passes away while the policy is active, his nominee will receive the death benefit of Rs. 25 Lakhs.
• In case Aditya survives the entire policy term, he will be paid a maturity benefit of Rs. 25 Lakhs.

Non-linked insurance plans can be further classified into participating and non-participating insurance policies.

• Participating Policies: Here, you get an opportunity to receive a share of the profits of the insurance company. So, along with the fixed death or maturity benefits, the insurance company may also pay bonuses, dividends, etc. These plans carry a certain level of uncertainty. But the risk associated with such policies is lower than that of ULIPs.
• Non-Participating Policies: Here, you don’t get to share the insurance company’s profits. Under such policies, if you pass away during the policy term, the insurance company will pay the death benefit to your nominee. And, in case you survive till the end of the policy duration, you will get the maturity benefit.

Now that we’ve understood what a linked and a non-linked insurance policy are, and how they work, let’s look at the differences between both.

So, these are some main points of difference between Non-linked Insurance Plans and a Unit Linked Insurance Plan. You can consider investing in a ULIP if your risk tolerance is high. And, if you are looking for a low-risk insurance policy that offers fixed returns, you can consider buying any of the non-linked insurance policies.