A ULIP or Unit Linked Insurance Plan is a hot-selling insurance plan that benefits investors by offering protection as well as returns. In addition, ULIPs contain technical benefits that many individuals tend to overlook. In this regard, if one does not know them before investing in ULIPs, they will not be able to reap the maximum benefit. So, here is a guide to understanding what a ULIP is, its types and its benefits!
What Is ULIP?
A ULIP (Unit Linked Insurance Plan) is an amalgamation of investment and insurance. The primary focus is to offer life cover and wealth creation. To understand the meaning of Unit Linked Insurance Plans, one must note that here an insurer puts a proportion of one’s investment into a fund and the remaining towards life insurance. Such funds can be equity funds, debt funds or hybrid funds.
The fund managers of the insurers manage and track these investments on behalf of the investors. These policies help to finance long-term goals such as marriage, higher education for children and retirement planning. Individuals who are eager to invest in ULIPs must go through the following sections to gain more awareness.
How Does ULIP Work?
After individuals invest their money in ULIP, the fund managers use a part of the premium in bonds and shares, while other parts in insurance coverage. In addition, managers also help look after the investments on behalf of investors. So, the investors do not have to go through the trouble of tracking their performance.
Additionally, in this investment option, investors are able to switch between debt and equity according to their risk appetite. They can also switch if they feel there is a window to earn extra return after seeing the market performance. This flexibility factor is a big deal in investment work, making ULIP so popular.
What Are the Types of ULIPs?
ULIPs can be categorized on the basis of wealth creation and the type of funds involved. The different types of Unit Linked Insurance Plans are listed below.
|Based on the Type of Funds||Based on Wealth Creation|
Are Unit Linked Insurance Plans Safe?
Often, conservative investors believe that these plans are risky financial instruments. However, this is not the case. Investors have control over the risk associated with ULIPs. If they wish to reap more benefits from ULIPs, they can take a higher risk and invest in equity-based funds. On the other hand, risk-averse investors can choose debt-based funds.
Further, there are options to redirect one’s funds. As such, the risk involved with this policy depends on the risk appetite of an investor.
What Are the Charges Associated with ULIPs?
These plans include certain expenses such as mortality charge, fund management charge, switching charge, premium allocation charge, discontinuance charge, partial withdrawal charge, policy administration charge and miscellaneous charges.
The returns from ULIPs may diminish if there are too many expenses. Moreover, what many investors don’t know is that such expenses have a threshold limit. The net RIY (reduction in yield) for plans with a tenure of ten years or below should not be over 3% during maturity.
In spite of this, investors need to find out the total number and amount of such charges before investing in a policy.
What Is the Lock-In Period of ULIP?
After the year 2010, the lock-in period of ULIP has increased from 3 years to 5 years as set by the Regulatory and Development Authority of India. However, if an investor wants to reap a considerable return on his or her investment, he or she must give it a time of 10 to 15 years.
Are There Tax Benefits on ULIPs?
A ULIP enjoys tax exemptions on both its payouts and premiums. Section 10(10D) of the Income Tax Act provides tax exemptions on the maturity proceeds, whereas Section 80C offers a tax deduction on the premiums of these plans.
What Are the Other Benefits of ULIP?
Besides tax exemptions, individuals can also reap the following benefits through ULIP investment:
- Death Benefit: ULIP provides death benefits to the dependents of the policyholder. It means that if the policyholder dies, his or her dependents will get the required financial support to continue their regular lifestyle.
- Meet Both Short-term and Long-term Financial Goals: Through ULIP, investors can fulfill their financial goals like providing for the education cost when their kids go to college. In contrast, they can also meet their short-term goals, like going on a family trip.
- Flexibility: The biggest advantage of investing in ULIP is policyholders get both financial success and health protection. In other words, a part of the premium is used for investing, while the other half is used to ensure insurance coverage.
Does the Investment Component Affect the Life Cover of ULIPs?
There is a common misconception that if the investment portion of a ULIP does not perform well, the life coverage will shrink. While the yields from one’s investment can decline if the selected fund underperforms, the insurance portion will remain unaffected. One will get the assured death benefit, irrespective of the performance of the mutual fund.
Can Investors Switch Between Mutual Funds in ULIPs?
Sometimes, the chosen fund in a ULIP may not fetch enough returns. In that case, investors may switch from one fund to another fund. They can transfer units fully or partially between balanced, equity and debt funds.
The switch can be for maximizing returns or lowering risk. In the case of new-age online Unit Linked Insurance Plans, investors may opt for the switching service online. Several policies allow a pre-decided number of cost-free switches that could be processed across a specific time period.
A ULIP is a favorable investment tool that helps individuals to fulfill their long-term financial objectives. It is an attractive option for investors who want to opt for life-risk coverage and market-linked growth. However, they should compare the different schemes and choose the most suitable option as per their risk appetite and needs.
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Frequently Asked Questions
What are 4G ULIPs?
Some life insurance providers have launched new ULIPs that offer the latest features and minimum charges. Such plans are 4G ULIPs or whole life ULIPs, or new-age ULIPs. The key feature of these policies is the elimination of premium allocation charges and return of mortality charges.
What is a sum assured in a ULIP?
A sum assured in a ULIP is the lump-sum money guaranteed to the nominee of a policyholder if the latter dies during the policy tenure. It is specified at the time of buying the plan.
What is fund value in ULIP?
Fund value in ULIP is the total value of the premiums acquired through different investment sources of an individual. The formula to calculate fund value is (Total Number of Units Held under a Policy X NAV or Net Asset Value).
Disclaimer: This blog is exclusively for educational purposes and does not provide any advice/tips on investment or recommend buying and selling any stock.