How ULIPs work: When an individual invests in a ULIP, he/she needs to pay a fixed premium for the selected cover amount. While some portion of the premium is used for providing insurance coverage the balance portion is invested in an equity or debt instrument.
When it comes to financial decisions, we usually tend to gravitate towards products that have “more” benefits. Unit Linked Insurance Plans (ULIPs) are one such category of products that pack in multiple benefits in a single investment. ULIPs come with the dual benefit of providing individuals with an insurance cover in addition to acting as an investment solution. ULIPs provide life cover and also help individuals create wealth by investing a portion of the premium in debt or equity assets. By investing in ULIPs, investors can get the desired life cover and invest for their financial goals as well. Simply put, ULIPs can create more value for investors.
How ULIPs work?
When an individual invests in a ULIP, he/she needs to pay a fixed premium for the selected cover amount. While some portion of the premium is used for providing insurance coverage the balance portion is invested in an equity or debt instrument. Investors have the flexibility to choose between equity, debt and balanced option for their investment plan. Additionally, they also have the option to switch between investment plans during the course of the premium payment. Fund managers manage the investment according to the fund type and invest in debt or equity instruments. It is important to note that as per the IRDAI, the lock-in period for ULIPs is 5 years and its performance or ability to generate returns is linked to the markets.
Insurance – one of the primary benefits of a ULIP is the life insurance cover that it provides. By investing in a ULIP one can protect their family from uncertain events and ensure that the family is well taken care of in case of the untimely death of the insured individual.
Financial Goals – the other major benefit that ULIPs provide is their ability to generate wealth through investment in equity and debt assets. For long-term goals, investors can choose to invest in ULIPs. They can choose from debt, equity or balance option according to their need, risk profile and investment time horizon. Since ULIPs have a compulsory lock-in period of 5 years and insurance, in any case, is a long-term product, investments in ULIPs can benefit from the power of compounding and eventually generate significant returns for the investor.
Tax Benefits – According to the Income Tax Act, 1961, the premiums paid towards a ULIP are eligible for a tax deduction under Section 80C. The maximum allowable deduction under this section is Rs 1,50,000. On maturity, the returns from the policy are exempted from income tax under Section 10(10D).
In addition to the above three major benefits, ULIPs are easy to invest in and offer investors the flexibility of switching between investment plans. As investors’ circumstances change, so does his ability to assume risk. By allowing investors to switch between debt and equity at no additional costs, ULIPs ensure that as an investor you are able to build an optimal investment portfolio that accurately reflects your risk-return requirements.
Points to know before investing in ULIP
In life, if we really want to succeed, we must constantly work towards building our knowledge and knowing more about the various aspects of our lives. When it comes to investment decision making, there are a lot of details that one needs to pay attention to. Below are a few more things that you should consider before investing in ULIPs.
- The sum assured is a minimum guaranteed amount that your unit-linked investment plan gives your nominee in case of your death. In case of death of the policy holder, the insurer will have to nominee the highest value of the following:
- The minimum sum assured, or
- The fund value as on that day, or
- 105 percent of the premiums paid.
- Minimum policy term will be 5 years.
- The grace period will be 15 days for monthly premiums being paid and 30 days in all other cases.
- Lock-in the period will be 5 years.
- If the policy has been discontinued after 5-years, then one can revive the policy within two years of discontinuation.
- Partial withdrawal is available after 5 years only. In the case of child policies, no withdrawal is allowed until the child becomes 18 years old.
- Same day NAV will be applicable if the premium received or redemption request received is before 3 P.M. Else, the NAV for the next day will be applicable.
- Standalone products that primarily offer one single benefit have their own advantages while products like ULIPs that offer multiple benefits have their own advantages. Any investment decision should be taken from a holistic portfolio perspective to ensure that one is able to meet all their financial, as well as, security-related goals.
(By Dhirendra Mahyavanshi, Co-Founder, Turtlemint, an InsurTech Company)