Everything You Need to Know About ULIP Plans
What is ULIP?
ULIP Full Form – (Unit Linked Insurance Plan) is the amalgamation of investment factor along with insurance. With a ULIP, an investor gets to cover both of his investment purpose as well as her/his life.
In ULIP plans, the insurance companies set aside a small chunk of your investment to support the insurance feature and rest of the amount goes into the funds (that are based on debt, equity or both). You can align the funds to your investment goals such as your children’s education, retirement planning or other crucial events.
How does the ULIP Function?
However, before investing in one, it’s important to understand that what is ULIP and how does it work. ULIP works differently for different individuals depending upon their financial goals and preferences. Let’s check how the insurance feature functions with the amount paid by different investors.
The insurance company makes the investment into small portions in bonds or share or other investment avenues. The rest of the amount is then utilized in providing the insurance cover to the investor.
There is a fund manager associated with every insurance company who manages all the investments done on behalf of the investor and the company. Fund managers help the investors get daily development report of their funds.
The investors also get to know the risk related matters associated with their funds. They can also choose funds based on the risk involved. Thus, by investing in ULIP plans, investors enjoy the flexibility to avail updates on their investments on daily basis.
ULIP Lock-in Period
In 2010, the Insurance Regulatory Authority of India (IRDAI) introduced some changes in ULIPs. Lock-in-period is one of such changes wherein it was increased from 3 years to 5 years. Again, as insurance is a long-term commitment, the investors need to wait until the policy matures. The policy term ranges from 10 to 15 years.
Advantages of ULIP
There are many ULIP benefits that are expected to be enjoyed by investors. Here’s a look into few of the major benefits offered by ULIP:
Income Tax benefit: Investors get access to income tax benefits by investing in ULIP. Under Section 80C of the Income Tax Act, the investors get to enjoy the tax benefits on the premium paid by them.
In addition to that, the return of the policy is also exempted from tax u/s 10(10D) of the Income Tax Act. So, in the end, you get to churn dual benefits by investing in ULIP plans.
Life Cover: By investing in ULIP, you also get access to life cover. It means that in case the taxpayer or the policyholder dies during the term of the policy, her/his family would get the sum assured.
The flexibility of a portfolio: As mentioned already, the process of ULIP is framed in such a way that the investors are able to switch their portfolio between equity and debt funds based on your level of risk. The investors will have knowledge of how the market is performing.
Long term finance goals: If an investor has a long term financial goal, he or she starts investing in ULIP plans. For example, if you want to buy a car or get married, ULIP plans are the best option for you.
In ULIPs, your money will grow on the compound interest formulae and bring huge chunks of money to you. The main objective of ULIP is to let the money grow for a longer period of time to bring the best amount to you out of it. So, truly it can be the best investment option for you.
Factors to Take Care of Before Making Investment in ULIPs
There are some of the important factors mentioned below to guide you about the pros and cons of the ULIP.
Personal Goal: If you want to increase your money and save it for the retirement period, this plan can be the best for you.
Risk Factor: ULIP carries a higher risk compared to ELSS.
Compare the ULIP Offerings: Once you have determined your financial goal and the type of ULIP you want to invest in, you need to compare different ULIPs offered in the market. Apart from that, you need to look into payments of the premium, ULIP performance, etc.
Types of ULIPs
Here’s a look into different types of ULIP that are mentioned below:
Funds You Should Invest Into
Debt Funds: Debt fund is considered the low risk and in return, it gives you a low amount.
Equity Funds: a Paid premium of the investor goes into the equity market and is considered the higher risk.
Balanced Funds: In this fund, the paid premium is balanced between equity and debt market and lowers the risk for the investor.
End Use of Funds
Child Education: The investors make the investments for carrying out their children’s education or to make up the unforeseen events.
Retirement Planning: If you are still employed, you have the option to make an investment for your future. You can make investments for your life after retirement.
Wealth Creation: You can use the investments to gain a financial corpse which can help you fulfil your dreams in your golden years.
Death Benefit to the Taxpayer or Policyholder
Type I ULIP: In case of unfortunate demise of the policyholder, the insurance company will pay higher of the fund value or sum assured to the nominee.
Type II ULIP: In case of unfortunate death of the policyholder, the insurance company will pay fund value as well as the value of the sum assured to the nominee.
Types of ULIP Fees and Charges
There are various charges involved in a ULIP investment. Let’s have a look into fees and charges related to ULIP:
Mortality Charges
These charges cover insurance coverage. The mortality charges rely on various factors like sum assured, the age of the policyholder, etc. This charge is deducted on monthly basis.
Partial Withdrawal Charges
There are some ULIP plans that allow the customer to withdraw money from their ULIPs umpteenth numbers of time; however, some of the ULIPs restrict the withdrawals to a maximum of 2 to 4 times. Overall, it’s important to understand that withdrawals are only free up to certain limits or you can be charged a certain amount on it.
Switching Your Funds
Moving from one fund to another is called switching. There are different ULIPs wherein you can get switching at free of cost. At the same time, there are also some funds that charge for switching.
Over to You:
Simply put, ULIP plans are the investment vehicles that first collect money from investors and then invest it into different assets on their behalf to earn returns. It is very much like taking a bus – and then the driver takes you to a destination. In case of ULIPs, the bus driver is actually a fund manager, the bus is your ULIP fund and you are the investor.
