When compared with traditional insurance plans, ULIPs would easily score on all fronts. Considering the benefits, ULIPs should not be just bought or sold as an insurance plan. In fact ULIP Plan can work for you as a one-stop solution for financial planning. ULIPs provide you with potential high returns, anytime liquidity, flexible term and flexible insurance cover with 100% tax free returns.

An experienced Financial / Investment Advisor who is aware of all investment avenues, insurance products & taxation would surely advice to go for unit-linked plans as compared to traditional ones like endowment, money-back, whole-life & pension plans.

Here's a comparison between traditional and ULIP insurance products:

Charges
Try comparing the surrender value of a traditional insurance product and a ULIP at the end of three years and you’d be surprised. Lets say you’ve paid a premium of Rs. 30,000 per annum on a traditional risk cover for three years. Now at the end of three years you would not even get Rs 45,000 as surrender value. That huge deduction from what you have paid as premium for the three years is nothing but charges that are not transparent on traditional insurance plans.

On the contrary in case of ULIPs the initial charges vary from company to company but are comparatively much lower. In case of ICICI Prudential LifeTime Super the charges are 20%, 7.50% and 4% for the first three years on fresh premium installments while in case of HDFC Standard Life Unit-Linked Endowment Plan Plus they are 30%, 30% and 1%. Besides, the charges are slightly lower as the premium amount increases.

If you surrender a ULIP plan after 3 years you tend to get back almost 100% of what you have paid even if it has been invested in a debt fund. For instance if you consider a growth of 6%, ICICI Pru’s LifeTime Super would get you Rs 85000/- at the end of three years and at a growth rate of 10% it would give you Rs 91000. Similarly, HDFC’s Unit-Linked Endowment Plan Plus would get you Rs 76000/-

The surrender value can be more if you invest in an Equity Fund as historically the long term equity returns tend to be in the range of 12% to 20%. And if you switch actively between equity and debt as per market conditions, you can make a killing. You must select a ULIP that has comparatively reasonable charges when compared with its peer products offering similar features.
(Charges are charged towards medicals done, actuarial fees, policy document stamp duty, agents commission etc.)

Commitment
In case of traditional plans you need to pay premiums for a fixed term of 25 or 35 years. And in case you happen to skip premium payment even for one year, your policy would lapse. In ULIPs, you have flexibility to stop paying premiums anytime after three years and the life cover and rider cover benefits continue. Mortality charges are adjusted against your existing investment corpus.

Flexible Cover
Traditional plans do not allow you to increase your sum assured. You are required to take a new policy each time you want to increase your insurance cover. But ULIPs allow you to increase your insurance cover anytime.

Returns
As per IRDA guidelines, traditional plans have to invest atleast 85% in debt instruments (majorly G-secs) and a maximum of 15% in equities, which results in overall returns of around 6% (after deduction of expenses and other charges if any). Whereas in ULIPs, you can maximize your returns by investing upto 100% in equity or debt as per market conditions. Also most ULIPs offer, 4 free switches every year.