Unit Linked Insurance Plan (ULIP)
ULIP is a combination of investment and insurance balancing the equity and debt management based on financial objectives of the investor. It has flexible premium payment and customisable investment option; however, is subject to risk associated with the capital market.
Therefore, before opting for a Unit Linked Insurance Plan, it is important to know various factors like benefits and returns to make the most out of it. Here is a detailed overview to help you in choosing the right plan.
What Is Unit Linked Insurance Plan (ULIP)?
ULIP is a market-linked investment plan for financial protection and long–term savings. It offers multiplied growth through wealth creation and life cover. The new-age ULIP products are a comprehensive proportionate blend of traditional savings under one plan with maximum benefits, ULIP returns, and minimal charges.
Two pillars of traditional savings that ULIP combines are -
- Medical or term insurance.
- Investments in equities.
Still wondering what ULIP is and how it differs from the traditional savings scheme?
The answer to this question is it is an exclusive option of switching the investment from debt to equity and vice-versa.
Moreover, ULIPS tax savings scheme is one of the most important factors that highly benefit the investors. The investor can claim deduction under the Standard Income Act of 80C.
How Does ULIP Work?
The working of a Unit Linked Insurance Plan is very interesting. Once an investor pays the premium, the policy provider distributes the amount in two parts -
1. Life cover
2. Investment in debt and equity.
Fund options are selected by the investor based on wealth creation objectives and risk appetite.
ULIP works much like mutual funds, where the insurance company provides Units based on the proportion of the investor's premium invested in the market. Here Units present investments as declared as Net Asset Value.
If you partially withdraw from the corpus, then the specific unit is sold.
Here is an example to demonstrate how ULIP works -
For instance, Shekhar invested in a ULIP for 20 years. His age is 30 years, and he opted to pay a yearly premium of ₹50,000.
Here are the policy details –
| Initial Sum Insured | ₹50,000 x 10 (years to pay premium) = ₹5,00,000 |
|---|---|
| Yearly Administration And Other Charges | ₹25,000 |
| Annual Investment | ₹47,500 |
| Initial Net Asset Value | ₹10 |
| Purchased Units | 47500/10 = 4750 |
ULIP plan return in respective cases is -
- Death Benefit - If Shekhar dies between the policy period, his nominee will get the sum assured, i.e., ₹5,00,000 or fund value, whichever is higher.
- Maturity Benefit - After 20 years, if Shekhar remains alive, he will get maturity benefit as total fund value.
What Are the Major Types of ULIP?
There are four categories or types of ULIP, depending on the category of investment units -
1. Debt Funds– In this type, the premium is invested in debt instruments like corporate bonds, government securities, etc. Here the return is low, and risk is also lower compared to other types.
2. Equity Funds- Here the premium is invested in company stocks with a goal of capital appreciation. Therefore, the risk is medium to high due to the volatility of the stock market.
3. Hybrid Funds- The premium is equally balanced between equity and debt instruments to minimise the risk of the investment. The inherent risk of equity is counterbalanced by investment in debt.
4. Cash Funds– Here the premium is invested in Money Market Funds like investment in bank deposits, money market instruments, cash funds, etc. It involves slow risk.
Based on financial needs, ULIP is of the following categories -
- Retirement – Under this plan, after retirement, you get wealth to support the lifestyle expenditure.
- Wealth creation – It ensures long term financial stability to get period based market return.
- Children – It is a long term plan that helps your children get financial support in the future.
How to Invest in ULIP?
Steps to invest in ULP are -
- Select a ULIP insurance provider based on your market research, browse the website and sign up to create a login account.
- Select ULIP fund options as per your objective, such as equity and debt funds.
- Incorporate an adequate amount in life insurance cover to give enough coverage to your family in case of your early demise.
- Select a tenure that fits your goals. Generally, a long investment horizon assures greater benefits.
- Select a plan that provides maximum ULIP tax benefits. Check the premium amount and tenure using the ULIP calculator. Read all terms and conditions before finalising.
- Fill up the application form, attach documents according to instruction, and complete the payment process.
Keep the credential details safe with you to further track and access your account.
Before investing in ULIP, you should understand what is ULIP plan in insurance and how it can benefit you. Therefore, focus on the objectives of ULIP and accordingly select the insurance provider and plan options.
Factors to Consider While Investing in ULIP
Key factors to consider while investing in ULIP are -
- Fund options to select like equity, debt, and life cover.
- Features of investment profile related to top ULIP products.
- Investment goals according to risk appetite financial objectives.
- Tenure of investment and premium payment.
- Premium amount.
- Risk factors.
- ULIP charges.
What Are the Benefits of ULIP?
ULIP offers an array of benefits, including tax benefits; those are as follows -
- Flexibility to choose fund options.
- Chang the insured sum for life cover plan.
- Change premium investment.
- Customise the ULIP for maximum protection.
- Transparency.
- Customise lock-in period.
ULIP tax benefits
- Get tax benefit on premium payment under Section 80C & 80D.
- Return on investment is non-taxable.
- Tax-free debt equity switches.
- Tax-free maturity benefit.
What Are the Returns from ULIP?
ULIP has higher returns, which varies based on the tenure of investment, withdrawal period and policy of the insurance provider. ULIP returns in 10 years are higher than those in 3 or 5 years. It is ideal to opt for a long term plan over a short term plan.
The investment gives the best returns when the financial strategy is strong. Following the above mentioned prospects and doing a market study can let you reach financial goals. ULIP is one of the most effective plans if investment options are right according to the market.
Frequently Asked Questions
Under which section of Income Tax are ULIP tax exemptions available?
Under section 80C, 80CCC, 80D, 10A, 10D tax exemptions are applicable.
What is the maximum deduction on ULIP premiums available under section 80C?
You can save a maximum of up to ₹1.5 lakh on ULIP premiums under section 80C.
What are the charges applicable under ULIP?
ULIP comes with premium allocation fees, mortality charges, fund management, partial withdrawal charges, switching, and policy administration charges.