Unit-linked insurance plans (ULIPs) are designed to enable policyholders to get market returns along with insurance cover. Generally ULIP policies are available with income fund, where money is invested in debt instruments bearing moderate risk; balanced fund, where money is invested in both debt and equity to keep the risk in moderate to high level; large cap fund, where the market risk is high despite investing in large and established companies and growth funds where money is invested in very high-risk small and mid cap funds. As this type of plans offer protection along with market returns, the nominee will get the sum assured if the policyholder dies prematurely.
However, before going for a ULIP plan, the prospective investor should study the plan carefully. There are some little known facts about such plans, which the investor should take note of. Following are five such facts.
1. Fund switching facility: A policyholder has the option to switch his funds from one plan to another depending on the prevailing economic and market conditions to reduce risks and to get higher returns. Such switches may be done by sending request to the company or online. Generally online switching is less expensive or even free up to a limited number of switches depending on the terms and conditions of the particular plan.
2. Stretching the maturity date: As the maturity amount depends on the market conditions, it is advisable to take a policy, which has option to defer the maturity date by way of deferment of either the entire maturity amount or through installments, with the option of withdrawing the balance amount anytime. This will enable the investor minimise the loss in case the maturity date falls on a day when markets are in very low levels. Through deferment, the investor may fetch a handsome return by withdrawing the maturity amount when market conditions improve.
3. Amount receivable on death: In ULIP policies, investors generally have the option to chose how he wishes to receive the sum assured as multiple of annual premium. For example, there may be options of choosing the sum assured as 5 times the annual premium or 7, 10 or 20 times, depending on the terms and conditions of a particular policy. As the amount payable on death is higher of the sum assured and fund value, it is advisable to choose a higher sum assured to get reasonably high death cover even if the investor needs to pay higher premium.
4. Choosing proper sum assured to avail tax benefits: ULIP policies are eligible for tax deduction under section 80C as well as the maturity and death claims are tax free, provided the sum assured is 10 times the annual premium. So, to avail the tax benefits, the investor should not opt for a sum assured which is less than 10 times the annual premium.
5. Reduction in units: The expenses to run a ULIP scheme are charged by reducing the equivalent number of units from a policyholder’s folio under various heads like premium allocation charge, fund management charge, policy administration charge, mortality charge, partial withdrawal charge, switching charge, premium redirection, discontinuance charge, miscellaneous charges etc. So, it is very important for a prospective investor to inquire about the number and quantum of charges before choosing a plan as excessive charges impact the return inversely. It is also advisable to manage the policy carefully to avoid attracting unnecessary charges to maximise the gain.