Unit-Linked Insurance Plans (ULIPs) or Unit Linked Insurance Policy is a type of life insurance plan that offers a combination of life insurance protection and investment. ULIPS have gained popularity in India, attracting individuals who want both life insurance protection and wealth creation.
What are ULIPs?
ULIPs are a type of insurance plan that is fairly popular in India. These plans consists of two components: life insurance coverage and investment in assets for wealth creation.
How ULIPs work?
ULIPs utilize the premium paid by the policyholder into two parts: insurance coverage and investment. A portion of the premium goes toward providing life insurance protection, ensuring financial security for the policyholder’s beneficiaries. The remaining amount is invested in various market-linked instruments, such as stocks, bonds, or mutual funds, based on the policyholder’s chosen investment funds.
Flexibility & customization of ULIPs
ULIPs provide flexibility of choosing investment options and asset allocation. Individuals can choose between different mutual funds, including equity funds, debt funds, or balanced funds, as their investment option based on their risk appetite and financial goals. Policyholders can switch between the different types of funds with their changing investment preferences or market conditions.
Lock-in and long-term focus
ULIPs have a lock-in period, usually five years, during which the policyholder cannot withdraw funds invested. This lock-in period is designed for tax benefit eligibility and also encourages long-term investing and discipline.
Transparency & disclosures of ULIPs
ULIPs provide regular statements and disclosures. As a policyholder, you will receive detailed information about the value of their investments, the charges applied, and the performance of the chosen funds. This helps you to make informed decisions and track the progress of your investments.
Cost structure of ULIPs
As a managed insurance and investment, ULIPs have some charges associated with them, including premium allocation charges, policy administration charges, fund management charges, mortality charges for life insurance coverage, and surrender charges if the policy is terminated prematurely. When looking to invest in ULIPs, it’s important to understand these charges and their impact on the overall returns.
Why Should You Invest in ULIPs?
ULIPs have the dual advantage of life insurance and investment for wealth creation. Should you invest in a Unit-Linked Insurance Policy? Here are salient features of ULIP insurance plans.
Why not to invest in ULIPs? Don’t invest in ULIPs when your objective is to have adequate insurance cover for the day when you are no longer there to take care of your family. It’s better to use ULIPs as supplementary insurance cover policies. When you just need to get your life insured, you should opt for term life insurance which are pure-insurance plans with bigger death benefits.
Life insurance protection
ULIPs provide the benefit of life insurance coverage, which is essential for providing financial protection to policyholders’ beneficiaries in case of their untimely demise. When the policyholder dies, the death benefit ensures that loved ones are financially secure and can cover expenses, repay debts, and maintain their standard of living.
Investment instrument
In addition to life insurance protection, ULIPs also provide the opportunity to create wealth through market-linked investments. Policyholders can benefit from the growth potential of equities or the stability of debt instruments, depending on their risk profile and investment objectives.
Flexibility and fund switching
ULIPs don’t force policyholders to stick with their original choice. With ULIPs, policyholders can switch between different investment funds based on changing market conditions or individual preferences. This flexibility enables policyholders to align their investments with changing financial goals and market situations.
Tax benefits
ULIPs provide tax benefits under Section 80C of the Income Tax Act, allowing individuals to avail deductions on the premium paid. Additionally, the maturity proceeds and death benefit received from ULIPs are tax-free under Section 10(10D) of the Income Tax Act, subject to certain conditions. For ULIPs issued on or after 1 February 2021, the tax exemption under Section 10(10D) of the Income Tax Act will apply only where the aggregate annual premium (of all such policies) doesn’t exceed Rs 2.5 lakh. No such limitation applies on policies issued before 1 February 2021.
Disciplined savings and long-term investment
ULIPs also promotes financial discipline and savings with a long-term investment approach. The lock-in period encourages individuals to stay invested and benefit from compounding returns. It is especially valuable for individuals with long-term financial goals.
Customization and goal-oriented investing
ULIPs provide the flexibility to customize investments based on individual risk tolerance and financial goals. ULIPs allow policyholders to align their investments with their unique requirements.