Everything You Wanted To Know About Ulip!
A unit-linked insurance policy (ULIP) is a combination of investment and insurance designed to protect you against longevity, morbidity, and tax risks. An insurance company puts in place a portfolio that keeps changing with the market and that portfolio is designed to ensure that the product has a return higher than or equal to a fixed deposit. Although ULIP’s are a very popular investment option in India, most customers do not know what they are buying. To ensure you make the right decision, this post will give a detailed explanation of a Unit Linked Insurance Plan.
What is a Unit Linked Insurance Plan?
ULIP is a combination of insurance and investment. It provides life insurance coverage along with investment benefits, which allows you to safeguard your family in the event of your unfortunate demise and helps to accumulate wealth by making investments in financial instruments.
It is a long-term plan that helps you save for the future while also providing life insurance. The amount you pay into your plan is invested in equity and debt funds. These investments can be used to fulfil your life goals such as marriage, child education, or starting a business.
When you invest in ULIPs, you’re pooling together your money with other individuals’ money. The portfolio of all ULIP plans will be managed, and the returns will be greater than what you’d get from a savings account.
Why should you invest in ULIPs?
- Coverage for Life
ULIPs provide life insurance as one of their major benefits. This feature allows ULIP holders to have the reassurance that their family is provided for in case anything happens to them and helps their dependents sustain a comfortable lifestyle in the event of their unfortunate demise.
- Support Life Goals
ULIPs are a good option for people with long-term goals. If you invest in one, it will get larger and larger, and you’ll get more money than if you had just put the same amount into a savings account. They are good investments if you want to save money for goals like buying a house or having a child. All you need to do is make sure that you stay invested for a long time and you’ll be able to make the most out of it.
- Flexibility
ULIPS allows you to switch your portfolio from debt to equity, or to otherwise vary the risk ratio based on how the market is performing. Insurance companies allow a far smaller number of switches for free. This provides you great flexibility and helps to mitigate the risk associated with your investment by diversifying your portfolio.
- Tax Benefits
Ulip tax benefits are a feature of ULIPs that makes it a very viable option for investment. According to Section 80C of the Income Tax Act, the premiums paid towards a ULIP are tax-deductible. Moreover, even the maturity proceeds are exempted from any kind of taxation as per Section 10(10D) of the Income Tax Act. This makes Unit Linked Insurance Plans highly approachable to enjoy tax benefits.
Components Involved in a Unit Linked Insurance Plan
- Funds
ULIPs feature a diversified choice of funds available. There are three major types of funds available with ULIPs as stated below:
- Equity Funds – Funds in which the premium you pay for your ULIP is invested in the stock market. It’s riskier because it’s directly tied to the ups and downs of the market, rather than being tied to a fixed, predetermined rate of return.
- Balanced Funds – Balanced funds are essentially low-risk funds that include both income-generating securities (bonds) and securities that generate capital growth (shares).
- Debt Funds – Debt funds, also known as fixed maturity plans (FMPs), invest in bonds and other debt instruments and offer a higher level of safety compared to equity funds.
Types of Charges in ULIP
ULIP charges cover a large number of different things, so it’s good to know what they all are and how they affect you:
- Premium Allocation Charge
Premium allocation charge is a charge that is deducted from the premium paid in the initial years of your policy. This is a variable rate and can fluctuate depending on how much you invest in a policy. This fee is added to your final policy price and is charged as a flat amount, as opposed to other fees that can be calculated as either a percentage.
- Mortality Charges
Certain insurance plans have what is called mortality charges, which are applied every month. They depend on many factors including your age level and how much money you have, and they help support the insurance plan. This charge is essentially an insurance premium and will be higher for somebody who is older or has a higher sum assured.
- Fund Management Charges
Fund management charges are the fees that your insurance company levies to manage the policy funds. It is determined before the NAV (net asset value) gets calculated, so it will directly deduct from the value of your investment. The maximum fee a fund house can charge is 1.35 per cent a year, and this is charged daily. Inequity funds, you’ll find the charge to be the maximum allowed, while in other schemes the fee is much smaller.
- Partial Withdrawal Charge
Some ULIPs have withdrawal limits of 2-4, while some have no limits at all. Some charge a fee for each partial withdrawal, while others do not charge any fees. ULIPs give you the option of withdrawing a certain percentage of your fund balance.
- Policy administration charges
This charge is levied for the administration of the policy. It is deducted monthly by the cancellation of units from all funds chosen. The fee can be fixed or charged as a percentage of your premium.
The Takeaway
Some people, who do not know much about life insurance and its advantages, find it difficult to select the right plan. With this post, we tried to give a detailed explanation of what ULIP is and how it differs from other types of life insurance policies like term insurance
