ULIP or Unit-Linked Insurance Plan is basically a life insurance policy with the added benefit of investment in market-linked instruments. Regular term insurance policies do not offer this advantage, which is why ULIPs have become popular. The premium that the policyholder pays to the insurance company is divided into two parts:
- One part is used for providing life insurance.
- The other part is invested in the market, and the gains from these investments accumulate to form a corpus for the policyholder.
However, the decision as to how much goes towards life insurance and the investment is decided by the policyholder. Therefore, the insurance company works based on the policyholder’s decision.
Investments are categorized into two segments:
- High-risk high-gain investments
- Low-risk low-gain investments
The market-linked financial instruments are mutual funds, and the policyholder has a pool of 5-7 funds to choose from. These are either equity, debt, or a balance of the two and have different risk levels.
It is up to the policyholder to choose the fund. If the risk appetite is small, then low-risk investments, i.e., debt-based mutual funds, are the best. Returns are low, but then so is the risk. People with a high-risk appetite usually opt for high-risk, high-gain investments, i.e., equity-based mutual funds. Some decide to go for balanced funds. It ultimately depends on the risk the policyholder is willing to take.
However, there are certain facts that you must know before going in for a ULIP Plan.
Before going for a ULIP, it is essential to analyze your financial goals. For example, what do you want in terms of returns and whether you can invest now and stay invested for an extended period? Do your finances permit such an outlay?
The objective to invest in a ULIP plan, be it for a reasonable return on investment together with a life cover or solely for investment purposes, will decide the premium that goes into the investment and what remains for the life insurance part. So, for example, if the idea of investments and gains is the objective, then a higher portion of the premium would need to go towards the investment.
ULIP plans offer the flexibility to change from low-risk investments to high-risk investments or vice versa. Therefore, a change at any time is possible. However, the person investing in a ULIP plan must carefully check his own financial stability since these plans typically have a lock-in period of 5 years.
When deciding on a ULIP, it is essential to check the charges that the company might levy, such as initial charges, premium allocation fees, fund management fees, surrender charges, and mortality charges. Read the fine print carefully before signing.
In effect, it is necessary to check the features and benefits of each plan. Use the ULIP return calculator to see the returns you can expect.
The next important thing is to check the plan’s performance in the past. Looking at the plan’s performance in the past four years will give a good idea of what to expect and how well the plan has functioned. This is important as it shows the investment capabilities of the fund managers who will ultimately be managing the funds.
The other critical factor is the insurance company’s solvency, as it indicates the company’s financial situation.
Then there are tax benefits. All the premiums paid and the maturity amount is exempt from income tax. This is a guaranteed advantage under sections 80C and 10D of the Income Tax Act, 1961. It means that the premiums paid and the sum assured is free from income tax.
Since ULIP plans tend to do well over the long term, it is suitable for people who wish to use the proceeds after retirement. This gives a measure of financial security to senior citizens. This is a concept that works best with a ULIP plan.
ULIP plans give higher returns than other return-based life insurance plans, like whole life insurance or endowment plans. But there is an element of risk; whether it is small or large depends upon how the investment is planned. However, the plan generally gives a good return on investment in the long run.
Consider that the day-to-day hassle of managing your own portfolio is absent. Professional fund managers are doing all the work. This is useful because not everyone is well versed in the ways of the financial markets. Only the people who do this every day and follow trends can make informed decisions. Therefore, having an investment portfolio and not worrying about it except seeing which way the fund is heading is a great idea. If you see that the high-risk fund is not doing too well, move the funds to the low-risk fund. On the other hand, if the high-risk area is doing well, move some of the low-risk area funds into high-risk investments. The great part is the policyholder can do this anytime.
ULIP plans are highly flexible and sought-after financial products, and a carefully chosen ULIP plan can be a valuable addition to your financial portfolio. So start researching for the right one today!