What is ULIP Plan?
Unit Linked Insurance Policies or ULIPs are insurance policies which offer you the opportunity of wealth creation while providing the security of a Life Cover. In ULIPs, a part of your premium is dedicated towards your Life Cover and the rest is assigned to a common pool of money, called fund, which invests in equity, debt, or a combination of both. The returns on your investments depend upon the performance of the fund opted by you.
Why ULIP Plan is important?
- Freedom to choose your Life Cover:
In Unit Linked insurance policies, you can choose the amount of Life Cover that you want. In most ULIPs, the minimum Life Cover offered is 10 times your annual premium amount. However, depending on the policy and the insurance company, you can select your Life Cover amount as much as 100 times of your annual premium or even higher.
- Freedom to choose your investment type:
There are two basic types of funds: Equity Funds, Debt Funds and a mix of both called the Balanced Funds. Equity funds include investments such as buying shares of companies. Debt funds invest in government or company bonds. Balanced funds are those funds that invest equal proportions of equity and debt funds.
ULIPs allow you to invest in different funds on the basis of your investment goals and risk appetite. For example, if you wish to grow your wealth and don’t mind taking risk on your investment, you can invest in equity funds. Similarly if you wish to get steady returns on your investment, you can invest in debt funds.
In addition, you can also move your money between equity and debt funds by using an option called Switch. Most insurance policies offer a number of free Switches in a year, and for additional Switches, a small fee is charged.
With Unit Linked insurance policies, you also get an option called partial withdrawal+, which allows you to withdraw a part of the money invested in your policy. This option helps you to take care of immediate expenses such as, your child’s 10th, 12th or graduation fees, going on a family vacation, in case of emergencies, etc. Partial withdrawals are usually free of cost.
- Goal based planning:
ULIPs are structured to help you secure your key goals such as wealth creation, retirement planning or saving for your child’s education. So, apart from the life insurance benefit and the wealth creation, ULIPs also give you the added benefit of knowing that your premium is working towards securing your future goals.
- Tax benefits:
Under the Income Tax Act, 1961, you can save tax on your hard earned money by investing in a ULIP. You can get tax advantage at different stages of your life insurance policy.
Stage 1: Entry Advantage – You receive tax benefits^ on your premium payments, under the Sections 80C, 80CCC and 80D
Stage 2: Earnings Advantage – The growth on your investments is not taxable^
Stage 3: Exclusive Switching Advantage – You can make completely tax-free^ debt-equity Switches
Stage 4: Exit Advantage – You also receive a tax free^ Maturity Benefit# under Section 10(10D)
Types of ULIP:
What are the different types of ULIP Investments?
- Equity Funds:These ULIPs invest primarily in high-risk equities and stocks on companies. They are the riskiest ULIP investment, and also the one offering the highest rewards. If you have a medium-to-high risk appetite, and think that fortune favours the bold – go for one of these plans. If you win here you win big.
“High risk, high reward”
- Income, fixed-interest, and bond funds:Under these ULIPs, your funds will be invested in government securities, fixed-income securities, corporate bonds, and the like, which offer a medium and risk, and medium reward.
“Medium risk, low to medium reward”
- Cash Funds:Investments in these ULIPs will see your corpus directed towards money market funds, cash and bank deposits and other money market instruments which are in the lowest risk category.
“Low risk (almost no risk) and low reward”
- Balanced Funds:These are the most stable and prudent investment based on the very fact that they vary the amount of investment that goes to different places. It invests in proportion, and divides the total investible amount between equity investments in high risk equities, company stocks, etc. and fixed-interest instruments which pose a lower risk.
Factors affecting selecting ULIP?
💡 Know your risk appetite and what the ULIP offers:
Market risks on a ULIP’s underlying investments are the same as that of mutual funds or direct investments in equities / fixed income securities. This investment risk of the portfolio is borne entirely by the policy holder and will need to be monitored actively. Thus, you should ascertain your risk appetite, financial commitments and funding needs before choosing the appropriate plan.
💡 Premium payment options:
ULIPs usually offer three options for premium payment. Make sure you choose a plan that offers you the option you are most comfortable with.
- Single premium payment plan under which the premium for the entire plan is paid upfront as a lump sum
- Limited premium payment under which you can choose a particular number of years to pay premium, for example 5, 7 or 10 and
- Regular premium payment under which you pay it for the entire term of the policy.
Charges take away from the value that accrues to you as an investor, which is why it is important to know how much is levied on the fund value. Typically, a ULIP will be subject to minimal administration, fund management, switching and surrender charges.
💡 Switching flexibility:
An investor’s market view, time horizon, and risk appetite will determine the initial allocation but these change over time. ULIPs offer the flexibility of switching between the funds based on changes to each of these factors.
The number of free switches during a policy year, the cost of switches and the ease of switching are factors that are important evaluation points when choosing a ULIP.
💡 Limitations & exclusions:
Since investment returns are not always guaranteed, it is important to know what will be the limitations and exclusions on the sum assured in case of death or permanent disability. The insurance aspect should thus be subject to the same due diligence and scrutiny as the investment aspect.
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