What is ULIP?
Unit linked insurance plans [ULIP] are a combination of insurance and investment. The policyholder can pay the premium either monthly, quarterly or annually. While a small portion of the premium is for the life coverage, the remaining money gets invested in multiple fund options available under your plan. The lock-in period of a ULIP Policy ranges from 3~5 years [depending on when you purchased your ULIP]. An investor must opt for a longer policy term since it allows growth of the corpus.
ULIP insurance allows you to allocate your money in equity and debt funds based on your risk appetite. An aggressive investor must select equity-oriented fund option, whereas a debt option can be opted by a conservative one. ULIP offers an investor the flexibility of free switches between funds. You can switch your portfolio between debt and equity based on your risk and knowledge of the market’s performance. Under Section 80C of the Income Tax Act, 1961, you can enjoy tax benefits on the premiums as well as the maturity benefits. While the premium is deductible up to Rs. 1, 50,000, the maturity pay-outs are tax-free.
There are two different types of ULIPs
- Type- 1 ULIP
In case the policyholder dies, whoever is the nominee, will receive either the fund value or the sum assured, whichever is higher. When a policyholder opts for Type 1, he might obtain high returns. Moreover, the timely payment of premium ensures the reduction of risks.
For example, ‘A’ holds a Type-I ULIP that gives her a sum assured of Rs 5 lakh for an annual premium of Rs 50,000.
In case of death in the initial years of the policy, when the fund value is less than the sum assured, the insurer will pay the agreed sum [which here is Rs 5 Lakh] to A’s nominee. However, if the fund’s value goes higher than the sum assured, the death benefit amount will be the accumulated fund value. Type 1 ULIP has lower premium amount as compare to other ULIP types.
- Type- 2 ULIP
In case the policyholder dies, whoever is the nominee, gets Fund Value + Sum Assured. In this structure, the liability of the insurer remains constant at Sum Assured until maturity.
For example – The nominee of “A” gets the sum assured and the amount accumulated in the fund as on the date of death by the insurer. Under the type II policy, the insurance company charges an extra cost for the additional risk.
Which one should a user buy?
Since ULIPs offer dual benefits, you can be assured of adequate life coverage to cover all your emergencies. However, selection between these two types has its own pros and cons. The right thing to do before investing in the best ULIP for yourself is considering your needs and opting for one of the two types.
If want to purchase a ULIP to fulfill a life insurance requirement in your portfolio, consider investing in a Type-II ULIP. However, if you’re looking towards ULIP as an investment vehicle, go with a Type-I ULIP. The charges are lower, and you only get the fund value on maturity, which decreases the life insurance company’s liability. However, ensure that your Sum Assured is ten times your annual premium amount, in order to claim tax benefits under Section 80C and 10[10D] of the Income Tax Act, 1961.