ULIP/Unit Linked Insurance Plan has emerged as a popular life insurance policy in the Indian insurance market. It not only provides the policyholder with financial security against life risks, but it also gives solid investment opportunities. The policyholder can invest in a wide range of funds, including mutual funds, equities, and bonds. In other words, this is one of the investment plans that allows for protection and investment to be managed based on the life insured’s different preferences, risk appetite, and needs. As a prospective ULIP buyer, you should make your investment decisions by taking into account different factors.
When purchasing ULIPs, as with any other type of insurance plan or financial instrument, you must exercise prudence and pay close attention to different factors before buying the particular plan. If you are choosing ULIP as your investment option, you must keep in mind different factors that ensure you are getting the best out of your investment. In this article, we will be talking about those factors in detail:
Analyze the risk associated with the particular investment fund: Different ULIP funds have varying levels of risk. Therefore, it is critical to choose one that is appropriate for one’s risk tolerance. One could use an investment calculator to further understand the returns. Avoid investing in a high-risk fund unless you are certain of the results you seek.
Check the life cover provided by the ULIP plan: Never forget that ULIPs are, first and foremost, insurance products. When purchasing a ULIP, pay particular attention to the death benefit. The suitable unit-linked insurance plan will provide adequate death coverage and prove to be truly valuable to your family in the event of your demise.
Compare. Compare. Compare: You must compare different investment plans with ULIPs to guarantee you select the best plan. It is incredibly simple to compare ULIPs online, and it only takes a few minutes. There are many good online insurance aggregator portals that allow you to do that free of charge. So, carefully compare the ULIPs and select your appropriate cover.
Choose the apt amount of life cover: The primary goal of a ULIP plan is to assist you in meeting your financial objectives, such as saving for your child’s further education, a dream wedding, or retirement. In addition, ULIPs include a very crucial feature: life insurance coverage to protect your dependents’ dreams. In the event of your demise, the policy pays out a lump-sum payment to the nominee named in the policy, guaranteeing that dreams are not dashed in the absence of the policyholder. ULIPs allow for a minimum life cover of ten times the plan’s annual premium. The ULIP also allows you to choose the life cover based on his or her needs, subject to the limitations of a specific plan.
Understand your investment goals: Make sure you understand why you want to get the ULIP out of other investment plans. Every investment has a purpose, whether you want to buy a house or save for your children’s school. If you know what your financial milestone is, you can invest in the appropriate ULIP. With the help of the investment calculator, you can further understand the rate of return you will get by choosing the said plan.
Stay invested in the ULIPs for the long term: Just like other investment options, ULIPs also demand you to invest for the long term. ULIPs have a 5-year lock-in term, compared to 7 to 15 years for other investment alternatives. Even when you use an investment calculator, you will notice that the longer you stay invested, the better it will be for you. The lock-in period helps to create a disciplined and forced savings habit that prevents one from withdrawing the deposited cash as needed.
Tax benefits: ULIPs are one such investment plans that not only provide life insurance, capital appreciation, and attractive returns to investors, but they also provide significant tax benefits. ULIPs provide tax benefits under the rules of the Income Tax Act of 1961. Let’s look into the tax benefits at different levels of ULIP investment.
Stage 1: Entry Stage: Section 80C of the Income Tax Act of 1961 allows investors/policyholders to get tax benefits in the form of a taxable income deduction for premiums paid.
Stage 2: The earnings or capital appreciation stage: Growth or capital appreciation in the value of an investment is not taxable.
Stage 3: Unique Switching Advantage: ULIPs offer unique fund-switching options to combat the market’s volatility and maximize profits. Switching between debt and equity funds in a ULIP is totally tax-free.
Step 4: Paying out the benefit: The death benefit provided under the ULIP plan is totally tax-free under Section 10(10D) of the Income Tax Act, 1961. The maturity amount is also tax-free under the criteria outlined in the Income Tax Act of 1961.
Know the charges in the ULIP: The premiums you pay in a ULIP are invested in the chosen fund, which includes both debt and equity investments after all relevant expenses are deducted. The charges for ULIP are classified into several categories.
1. Premium Allocation Charges: The policyholder will be charged a premium, which will be distributed to the investor’s chosen fund.
2. Policy administrative charges: These costs are deducted on a regular basis to recover the insurer’s policy-related expenses.
3. Surrender charges: This relates to the deduction for full or partial encashment of premature units, as specified in the policy document. Surrender charges are calculated as a percentage of fund value or premium payments.
4. Mortality charges: Mortality charges are deducted by the insurer when providing life insurance to the insured. The rates will vary according to the age and sum assured.
5. Fund management fees: The insured bears the management fees for funds invested in equities, debt, or other defined funds.
6. Fund switching charges: ULIP plans allow you to invest your hard-earned money in multiple funds with varying equity and debt exposures. You can move between various funds whenever you wish.
7. Discontinuance charges: The insurance charges you a minimal cost if you discontinue your coverage prematurely. According to the IRDA, all insurance would have the same rates.
A unit-linked insurance plan can help you plan your retirement because it is a long-term investment. If you want to have a large retirement fund, you need to choose your plan wisely. One needs to understand that the ULIPs are subject to capital market risks.
