- ULIPs serve the dual purpose of providing life insurance along with investment
- ULIPs are a wealth-creating tool that fulfills your financial goals in the medium to long-term period
- ULIPs help you meet your life goals and keeps your family financially secured in case of your untimely demise
Why do individuals invest their money in various financial instruments? The primary purpose is to earn good returns and watch their money grow. ULIP (Unit Linked Investment Plans) is an instrument which not only helps investors earn market-linked returns but also provides with a life insurance cover. So what is it about ULIPs that make it such an attractive proposition?
What are ULIPs?
ULIPs are investment instruments that provide investors the combined benefits of investment and protection. The premium paid for a ULIP is divided into two components; one part goes towards providing life coverage while the other part is allocated towards investment in money market instruments. A ULIP holder has the option of either investing in equity, debt or a mix of both. It must be pointed out that the investment risks in ULIPs are borne by the policyholder and not by the insurance company. Similar to mutual funds, under ULIPs, investors are allotted units by the insurance company while NAV (net asset value) is declared on a daily basis.
How do ULIPs Work?
ULIPs work in a manner pretty similar to how mutual funds work. The following process is involved in ULIP:
- Once you have decided to opt for a ULIP scheme, you have to pay the necessary premiums to the insurer. These premium payments can be made either as a lump sum or can be made either annually, half-yearly, quarterly, or monthly depending on your income pattern or as per your convenience.
- Accordingly, a certain proportion of the premium is deducted by the insurer on account of premium allocation charges and mortality (cost of risk cover). The remaining premium minus the deductions will be invested in the funds chosen by the policyholder.
- The insurer then allots units to the various funds as chosen by the individual. Most popular ones are Equity fund (where your money will be invested into stocks), Debt fund (where your money will be invested into bonds, government securities, etc) and Hybrid or Balanced Fund (a mix of Equity and Debt). These funds are managed by a team of professional and experienced fund managers of insurance companies. Every time a premium is paid, the insurer allocates equivalent units out of that premium after making the necessary deductions to the policyholder.
- The insurer levies mortality charges along with policy administration charges periodically through cancellation of units. Further, the fund management charges (FMC) are adjusted from the NAV on a daily basis.
- You have a choice of transferring your money from one fund to another. This process is known as switching. Switching is helpful especially during falling markets as you can maximize your fund allocation even when markets are not doing well. Additionally, you are also allowed to invest an additional amount of money over and above the regular premium that you are paying. This is known as a top-up. You receive all the stated tax benefits on the top-ups as well.
- Lock-in periods are applicable to all tax saving investments and ULIPs are no different. Right from the starting date of the policy, ULIPs have a lock-in period of 5 years which means that you are allowed to withdraw your money only after completion of 5 years. Moreover, even if you choose to discontinue paying your premium before 5 years, you are entitled to receive your payout only after 5 years.
- On maturity, the units are redeemed and an equivalent amount is returned to the policyholders. However, in case of premature and untimely demise of the insured, his beneficiaries will stand to receive the claim benefit amount based on the product specifications.
Why Invest in ULIPS?
Once you understand ULIPs, you will undoubtedly see it for what it is; an investment opportunity. ULIPs provide a complete package of risk cover with returns along with tax benefits. Here are a few reasons why you should seriously consider making an investment in ULIPs if you haven’t done so yet.
ULIPs give you the freedom to decide where you would like to invest your money and makes it easy for a policyholder to switch from one investment variant to the other as per the market conditions between equity, debt and balanced fund options.
Additionally, ULIPs also allow you to choose between either the sum assured or the premium based on your needs. Through top-ups, you can even increase your investment portfolio to make the most of investment opportunities due to any change in the markets. This way, you can actively monitor your investments and maximize your returns.
In case of emergencies or unforeseen future events, ULIPs allow you to partially withdraw money from your Unit Linked account, but only after a period of 5 years from the inception date. The best part about these withdrawals is that they’re completely tax-free. Further, if you are looking for a loan against security, then you can use ULIPs to receive a certain percentage of the value of the fund, generally not exceeding 50 per cent, as a loan.
ULIPs provide not only life cover along with market returns but also gives double tax benefit. For premiums paid, ULIPs are exempt up to Rs. 1.5 lacs under section 80C of the Income Tax Act. Moreover, all payouts received upon maturity are exempt under section 10(10D) of the Income Tax Act, 1961
- Goal-Based Savings
ULIPs are designed to address key long-term financial goals such as buying a house, funding your child’s education, buying a new car etc. as it helps you in building a sizeable corpus in a disciplined manner. Thanks to the power of compounding, ULIPs provide favorable rates of return over long periods.