What are the Limitations of Investment in ULIP?

A Unit Linked Insurance Plan or ULIP offers two benefits in a single product: insurance and investment. Simply put, your premium for ULIP is divided into two parts. The first provides life cover, and the other is invested in money market instruments such as debt funds and the stock market.

In this article, we are going to discuss the investment limitations in ULIP and other essential details that you should be aware of before diving in.

There is no specific number for this. The minimum and maximum amount you can invest in ULIP depends on your requirements and the company or the provider.

The minimum investment in ULIP can be as low as Rs 1000 per month, depending on the company. Many companies offer different payment options like monthly, annually, etc., while some other companies offer their customer to make a single premium payment.

Generally, there is no cap on the premium amount for maximum investment. It can be any amount depending on how much you can pay as per your financial goals.

Also Read: What Is the Aim of Long-Term Budget Planning?

1. Absolute Returns

An absolute return on a ULIP investment is the increase in the value of the invested amount over time. It can be both negative and positive.

If you want to calculate the absolute returns value of a ULIP scheme, you need its current NAV and initial NAV, where NAV stands for Net Asset Value. Following is the formula for calculating the same:

[(Current NAV – Initial NAV)/Initial NAV] × 100

For instance, if your current ULIP NAV is Rs.500 and the initial NAV is Rs.400, the absolute return will be 25% in a year.

Also Read: What is Sum Assured in ULIP

2. Compounded Annual Growth Rate (CAGR)

Compounded Annual Growth Rate or CAGR is the sum of the investment's yearly growth. A formula for calculating CAGR requires the ULIP scheme's beginning value, current value, and the number of years invested. The formula is as below:

{[(Current Value of NAV/Beginning Value of NAV) ^ (1/Number of Years)] – 1} x 100

For better understanding, consider the beginning value of this scheme to be Rs.600 and the current value as Rs 700 after five years of investment. Hence, the CAGR in this scheme will be 3.13%.

Though it helps to grow your wealth in the long term, this investment has some limitations. Some of its drawbacks are:

• Lock-in Period: You cannot withdraw your money during the 5-year lock-in period. Even if you cancel the scheme, you must wait until the lock-in period ends to withdraw your invested capital.
• Costs: ULIPs have a high cost attached to them, so a large portion of your premium is first lost to cover these costs.
• Fund Switching Charges: Policyholders can switch funds for free, but these attract charges after a few switches.
• Not Ideal for Short-term Investment: This type of investment is usually long-term due to the lock-in period. Also, because of market fluctuations, ULIPs are not ideal for short-term investment.
• Complexity: ULIPs may seem difficult to individuals just beginning their investment journey because it involves insurance and investment. Additionally, you must constantly follow the money market and decide where to move or which fund to switch to.

Since the minimum investment in ULIP varies from one plan to another, you need to look at the benefits of this scheme before choosing a plan for yourself. ULIPs offer many benefits, some of which include the following:

• Dual Benefits Under a Single Scheme: You will not need to buy investment and insurance policies separately, as ULIP is the only financial scheme in India which provides both in one go. It provides investment opportunities while simultaneously offering life insurance coverage. This saves a lot of money and helps you reach your financial goals.
• Flexible Investment Opportunities: ULIP allows you to switch your investment between different funds, like debt funds and equity. Depending on market fluctuations, you can increase or decrease your asset allocation in these investment instruments. With this benefit, you can optimise your ULIP returns and align your financial goals with market trends.
• Tax Benefits: ULIP investments are eligible for tax deductions as per Section 80 C of the Income Tax Act, 1961. The amount you get at the time of maturity of your ULIP policy is also free from tax according to Section 10D of the Income Tax Act, 1961. Additionally, the amount received by the nominee if the policyholder passes away is also exempt from tax under Section 10 (10D) of the Income Tax Act, 1961.
• Possibilities of Higher Returns of Investment: The potential to get maximum returns is higher in ULIP schemes compared to other investment instruments. These higher return potentials are possible because of the flexibility offered between the investment funds. Additionally, insurance companies provide various offers and bonuses for existing customers as rewards for loyalty.
• Long-Term Benefits: You can choose a long tenure for investing in ULIP schemes and enjoy long-term benefits. By doing this, your money will be invested in the money market for a long duration resulting in higher returns. You can use this money from the long-term benefits for personal purposes like marriage, down payment etc.

Although there are investment limitations in ULIP, it can be quite beneficial and help you to reach your financial goals. ULIPs are ideal if you plan on investing in securities that offer a variety of rewards all under one roof. You can avoid the disadvantages and avail many benefits if you invest strategically.

Also Read: What is Free Look Period in ULIP?