Unit-Linked Insurance Plans, or ULIPs, are designed to provide both life insurance and investment benefits. Investing in ULIPs is intended to provide long-term investment and protection for family members in the event of the insured’s death.
The Unit Trust of India launched the country’s first ULIP in 1971. LIC Mutual Fund then launched a ULIP product in 1989. Both were successful in providing life insurance to unitholders while also yielding a fair return on investment.
ULIPs outperform endowment plans because they provide more clarity about how much of the customer’s money is invested and spent, as well as where the money is invested. ULIPS have experienced phenomenal growth in India over the last few decades, owing to the fact that they traditionally provided significant tax breaks.
So, when you invest in a ULIP, some of it goes to insurance, some goes to fees, and the rest is invested in shares, bonds, or a combination of the two, according to the scheme’s plan.
Types of ULIPs include equity funds, which invest in the stock market directly or through index funds. They are typically high-risk, high-reward strategies.
Debt funds invest in money market products such as bonds, debentures, and gilts. They are often less risky than equity funds, and the expected return is lower.
Balanced or hybrid funds invest a portion of their assets in money market instruments such as bonds and the remainder in equity. They emerged throughout time in an attempt to preserve investment while also promoting expansion.
Liquid Funds invest in products that mature quickly, such as T-Bills. They typically provide the lowest return while also posing little risks and the possibility to easily redeem the units.
Terms for ULIPs include the lock-in period, which prevents redemption of units.
NAV (Net Asset Value) is the value of a single unit of ULIP. It is calculated by dividing the current market value of the whole investment by the plan’s total number of units. This is the value you would receive if you were to redeem your ULIP.
The sum assured is the amount of money received by a nominee in the event of the insured’s untimely death.
Premium – The amount of money a policyholder pays to keep the coverage.
Riders – In addition to the death benefit, many ULIPs offer additional benefits for which a premium is required. One example is a critical illness rider, which pays a set amount to the policyholder in the event of serious illness such as cancer.
Switching option – Sometimes the fund house allows policyholders to switch between different investment options.
Surrender charge – The fund management company or insurance company may levy costs if the policy is cancelled before the lock-in date.
Fund management charges are the fees imposed by professionals and companies to manage the fund and its investments.
Advantages of ULIPs
- Insurance and investing provide a double benefit.
- Investments are professionally managed.
- Tax benefits on premiums paid: Premiums paid of up to Rs 1.5 lakh per year can be deducted under Section 80C of the Income Tax Act.
- A tax advantage on maturity money is also possible if the premium on a scheme is less than Rs 2.5 lakh per year and 20% less than the sum insured.
- Tax advantages for sum-assured: The money paid from a ULIP in the event of the insured’s untimely death is tax-free under Section 10(10D).
- If you withdraw less than 20% after five years, you will not be taxed.
- Most ULIPs allow the transfer of funds between debt and equity funds.
ULIPs provide the benefit of diversifying your portfolio by incorporating professionally managed funds, as well as the ability to effortlessly switch between equity, bonds, and hybrid funds. If you have a direct position in the stock market, you can purchase ULIPs that invest in bonds, and vice versa. This helps to diversify the risk across multiple investments.
Most fund management companies provide the ability to purchase ULIPs online. Here’s a step-by-step instructions:
- Visit the website of the investment management or insurance firm.
- Click on the ULIP that you want
- Check the sum assured
- Choose riders, if any
- Enter the tenure and amount to invest
- Enter periodicity of investment
- Make payment
