What is the difference between linked and non-linked insurance?

Insurance policies can generally be divided into two categories – linked and non-linked policies. The key difference lies in how the benefits under these policies are determined.

What is Linked Insurance?

Linked insurance refers to insurance policies where the benefits are linked to the performance of the underlying assets. The most common types of linked insurance plans are:

• Unit Linked Insurance Plans (ULIPs)
• Equity Linked Savings Schemes (ELSS)

In case of linked insurance plans, the premiums paid by the policyholder are invested in equity, debt and other asset classes as per the choice of the policyholder. The returns generated from these investments are passed back to the policyholder in the form of benefits.

Simply put, the returns earned on the fund’s underlying assets directly impact the benefits received under linked insurance policies. If the fund performs well, the policyholder receives higher returns. On the other hand, poor performance of the fund leads to lower benefits for the policyholder.

Some key features of linked insurance plans are:

• Offer opportunity to invest across various asset classes like equity, debt etc.
• Returns are linked to market performance of the underlying assets
• Involve an element of market risk as benefits fluctuate based on fund performance
• Generally offer life insurance benefit along with investment opportunity

Linked insurance plans allow policyholders to participate in capital market growth while also enjoying insurance protection. However, these policies carry investment risks that must be evaluated before purchasing.

What is Non-Linked Insurance?

Non-linked insurance plans have pre-defined or guaranteed benefits that are not influenced by market fluctuations. Some common examples include:

• Term insurance plans
• Whole life insurance policies
• Endowment plans
• Money-back policies
• Guaranteed income plans

In non-linked insurance, the premiums collected from policyholders are pooled into a common fund and invested conservatively. The returns generated from these investments are used to meet the policy liabilities and pay benefits as per the terms of the policy.

The key features of non-linked insurance plans are:

• Benefits are fixed and guaranteed at inception
• Returns are not dependent on capital market movements
• Involve minimal investment risk as returns are not linked to market
• Mainly offer life insurance protection

Non-linked plans offer stable and guaranteed benefits. As the returns are not linked to market performance, these policies do not carry investment risks. However, they offer limited opportunity to earn market-linked returns.

Major Differences

Here is a quick overview of the main differences between linked and non-linked insurance plans:

Who should buy Linked Insurance?

Linked insurance plans are more suited for individuals who:

• Have high risk appetite and want market-linked returns
• Are comfortable with some volatility in benefits based on fund performance
• Have long investment horizon to ride out market fluctuations
• Want insurance protection along with investment opportunity
• Seek wealth creation through equity market exposure

Examples of life stages where linked plans may be suitable:

• Young earners – At early stage of careers so can withstand volatility and focus on wealth creation
• Middle age – High disposable income to invest for long-term goals
• Looking for tax saving options – Under Section 80C for ELSS

However, linked insurance plans may not be appropriate for conservative investors who want fixed guaranteed returns.

Who should buy Non-Linked Insurance?

Non-linked insurance plans suit those who:

• Have low risk tolerance and want capital preservation
• Prefer stable returns unaffected by market movements
• Need life insurance protection without investment component
• Require guaranteed income for the long-term

Examples where non-linked plans may be more appropriate:

• Retirees or risk-averse investors – Want fixed returns and cannot accept volatility near retirement
• Looking for tax deferred corpus – Endowment plans offer tax-free corpus at maturity
• Seeking only life cover – Term plans provide pure insurance protection

Non-linked plans suit those looking for safety of capital and guaranteed returns.

Things to Consider Before Buying

Here are a few things to keep in mind before purchasing linked or non-linked insurance:

• Assess your risk tolerance and return expectations
• Understand your investment time horizon
• Evaluate all features and charges of the policy
• Check claim settlement record of the insurer
• Understand any riders or add-ons being offered
• Review applicable taxes and taxation rules
• Get clarity on premium payment options and flexibility
• Compare similar offerings from multiple insurers

It is crucial to evaluate both types of plans and purchase one that aligns with your financial goals and risk appetite. An independent financial advisor can help make an informed decision.

Conclusion

The core difference between linked and non-linked insurance lies in the way policy benefits are determined. Linked plans offer market-linked returns while non-linked plans guarantee fixed returns.

Linked insurance plans allow participation in capital market growth through equity and debt exposure. However, the returns under these policies can be volatile. On the other hand, non-linked plans offer stable and fixed returns by investing premiums conservatively.

Younger individuals comfortable with some investment risk may find linked plans suitable to meet long-term goals. Retirees and conservative investors may prefer non-linked options for capital preservation and guaranteed income.

Ultimately, the choice between linked and non-linked insurance depends on one’s investment objectives, life stage, risk tolerance and time horizon. Carefully evaluating both types can help make the right insurance purchase decision.

References

1. IRDAI Guidelines on Linked and Non-Linked Products
2. AMFI Guidelines for Linked Insurance Products
3. Insurance Information Institute – Linked vs Non-Linked Life Insurance
4. Investopedia – Linked Insurance Policies
5. PolicyBazaar – Difference Between Linked and Non-Linked Insurance Plans