Unit-Linked Insurance Plans, also known as ULIPs combine insurance and investment. You pay the premium monthly, bi-annually, or annually for a period between five and 15 years. A small component of the premium amount is deducted towards administrative, fund management, and allocation costs. The balance is towards insurance protection and investments in various instruments such as bonds and stocks.
You may choose between different financial instruments based on your preference and risk appetite. If you are willing to assume greater risk to potentially earn higher returns, you may invest in equity funds. Alternatively, if you want to reduce your risk and are satisfied with lower returns, you may opt for debt funds.
Similar to mutual funds, the premiums are pooled to form a fund and the same is invested in different financial products. You are allotted units based on the Net Asset Value [NAV]. The NAV may change daily based on the market performance of the various investment instruments.
Because the value of these insurance plans is market-driven, you may question if investing in these is prudent or not. Here are seven ULIP benefits to give you a clearer understanding.
1. Wealth creations
Depending on the financial instruments where the combined funds are invested, these types of plans often deliver better returns with power of compounding. If the money is invested in the stock market, you are able to earn higher returns on your investment when the markets perform well.
2. Insurance protection
In addition to providing an investment avenue, ULIPs include insurance protection. Therefore, it offers financial protection to your family members in case of an unfortunate event.
3. Versatility
These types of financial products provide versatility in terms of switching between different funds. Over a period of time, your life goals change and the flexibility to switch allows you to choose instruments that suit your current financial objectives. Additionally, you may benefit from market movements among different instruments and switch your investments between various products such as cash, debt, and equity. You may choose for pre-determined monthly switches if you do not have the time or knowledge to actively monitor your investments. Under this option, a specific amount is switched on the pre-determined date.
4. Productive long-term investment
If you want to invest your money for a longer period, ULIP insurance is an excellent option. Generally, the market fluctuates a lot in the short-term thereby delivering lower returns or in some instances negative returns. However, when you stay invested for a longer period, you are able to earn better returns on your investments. Therefore, if you want to build wealth to meet specific long-term financial goals such as children’s education, their wedding, and your retirement, these plans are ideal.
5. Tax benefits
Another benefit of these insurance plans is tax-free returns and other tax advantages. The premium paid on your ULIP is tax-deductible under section 80C of the Income Tax Act, 1961. In addition, benefits paid to your beneficiaries are tax-free in case of your demise. Moreover, you earn the higher assured benefits or the value of the investments based on the NAV. Such benefits are also not taxable as per the legal guidelines.
6. Partial withdrawals
The lock-in period for these types of insurance plans is five years. At the end of this period, you have the option of making partial withdrawals based on your financial situation. However, such withdrawals must not exceed 20% of the value of the fund. These partial withdrawals are also tax-free.
7. Top-up investment
Another benefit of these insurance policies is the top-up feature. Under this feature, you may increase the amount of your investment in case you desire. The additional investment amount is also eligible for the tax benefits and exemptions. However, you need to ensure the total investment does not exceed 10% of the total sum assured.
Although there are several benefits of ULIPs, check out some other details which will help us for a better investment planning.
- Lock-in period
These insurance plans come with a minimum lock-in period of five years. During this period, you cannot make any withdrawals.
- Market-related
The value of your investment depends on the performance of the financial products. In case of unfavorable market performance, the returns may be lower or even negative in extreme situations.
- Costly in the initial period
Generally, such insurance policies are more expensive in the initial years. This is because of the policy charges that are applicable during this time.
- Limited switches
Most insurance companies allow a limited number of free switches between funds. If you exceed this limit, you may have to incur certain transaction charges.
ULIPs combine protection and investment, which means the premium for life cover is higher when compared to term plans. Some people consider these plans to be complicated because of the various fees and charges. You may also not understand the amount that goes towards investment, insurance, and management charges. It is possible that you may not be able to exit your investment at the end of the lock-in period because of a lower fund NAV because of the higher costs in the initial years.
Although there are certain factors we need to take care in these plans, the several benefits make these a popular product. If you want to earn higher returns while procuring life coverage, a ULIP is an excellent option. However, it is important you compare different plans offered by various insurers to make an informed decision.