ULIP is the acronym for Unit Linked Insurance Plan, which as the name suggests is a life insurance product with additional benefits. The ULIP is a mixture of both a life insurance and an investment plan. In ULIP plans, the policyholder needs to pay frequent premium payments, a portion of which is used to offer life insurance cover. The other part is collected from the assets garnered from other policyholders, and is subsequently invested in financial securities including equity and debt funds, which are similar to mutual funds. Let’s now understand further about what a ULIP plan is and how to invest in these plans.
How Is a ULIP Policy Constructed?
The investment avenues discovered in the Unit Linked Investment Plan are somewhat similar to that of the mutual funds. The ULIP provider garners investments from various investors prior to allocating to different fund options on the basis of individual preferences.
The assets under ULIP plans are managed by fund managers, who work towards certain fixed investment objectives. As an investor, you can buy shares or ‘units’ in a single strategy or choose to diversify your investments across several market-linked ULIP funds.
When you opt for a ULIP plan, you have to primarily pay up a lump sum payment. Thereafter, you need to make premium payments for the plan – annually. semi-annually, or monthly.
The premium payment process varies between all the ULIP plans, and can be found out using estimates from the ULIP calculators available online at the insurers’ websites. The premium part that is invested in the ULIP policy is appropriately invested in a specific investment vehicle.
ULIP plans provide flexibility to the public, who might adjust their fund selection, depending on their requirements, in the entire investment horizon.
How Does ULIPs Work?
In the Unit Linked Insurance Plan, the premium amount paid by you is invested in the funds selected by you, post which the insurance company deducts certain transaction charges, which include –
1) Allocation of funds costs
2) Administration of policy costs
3) Management of funds costs
4) Mortality costs
ULIP being a long-term financial instrument, the core function of the ULIP is to offer enough wealth creating opportunities. On the other side of the story, the ULIP also functions as a life insurance cover to provide a further diversified return as a form of life insurance.
The investments undertaken in the ULIP plan are managed and assigned to one or many fund managers that your insurance provider appoints. Thus, you don’t have to keep track of the investments done on your own. However, you should track the performance of the individual ULIP fund manager and change from the options of funds without having to incur any additional charges to maximise your profits and not succumb to market volatility.
Fund Choices You Can Make Under ULIPs
The most common forms of investment choices available to you under the ULIP plans are –
a) Equity Funds
The pooled investment amounts are utilised to buy stocks; these stocks have a Net Asset Value (NAV) chained to them. NAV is similar to the price per share in the case of a stock or ‘unit’ in a fund. An investment in equities is inherent in high risk because of market volatility. Thus, investments in equities are also the most rewarding.
b) Debt Funds
The premiums pooled in a debt fund are used to buy securities such as Government Bonds and corporate debentures as these offer a lower degree of risk than equity investments. So debt funds, as compared to equity investments, provide a lower return on your investments.
c) Hybrid/Balanced Funds
Hybrid Funds, also known as Balanced Funds, are designed so that capital growth by equity investing is experienced while also making sure lower risks (by making the debt investments.) are made. In situations of high market volatility, any loss that a person might experience from equities is balanced out by the low risk and moderate returns from the debt position of the fund.
Benefits of ULIPS
Flexibility
Unit Linked Insurance Plans assists us in achieving our financial goals by offering the flexibility to:
- Change investment funds depending on our changing goals.
- Partial withdrawal facility upon completion of the initial five years of the lock-in period.
- Single streamlined premium payments to ease the process of investing more amounts of money along with the usual premium payments as and when needed.
Appropriate Application of Charges
The IRDAI mandates that the charges incurred in ULIP plans should be evenly applied in the lock-in period of five years to ensure that the insurance companies eliminate any high upfront changes of charges.
Tax Benefits
Premiums paid for the ULIP plans are eligible for tax deduction according to Section 80C of the Income Tax Act 1961 for an amount not exceeding Rs. 1.5 lakh in a year. Along with this, the maturity benefits received in the ULIP plans are exempt from any taxes according to Section 10(10D) of the Income Tax Act 1961.
What are the returns on a ULIP?
History is proof that stock markets give high returns in the long term. Being early in the game helps you create wealth. Following are few means through which one can maximise their returns in a ULIP:
- ULIPs come with a lock-in period of 5 years; one should not exit immediately after the lock-in period. You should stay invested in a unit-linked insurance product with a long-term duration in mind as these plans cater to give good returns over a long period.
- Being invested for the long term catalyses your wealth creation with the help of the compound effect working in your favour.
Conclusion
Before making any investment decisions, especially when you don’t have a personal finance app, you should always take help from the internet to choose from a range of investment options online. Unit Linked Insurance Plans provide various benefits and help you live your financial dreams. You should invest in any plan only once you understand the policy details thoroughly. Always read the fine print with great attention before buying a policy.
