ULIPs are unique investment products that also provide insurance at the same time. The premiums that you pay for your ULIPs are dedicated to fulfilling two goals: (1) securing a life cover to provide financial protection and (2) investing in equity, debt or balanced funds to generate wealth.
Today, some of the best ULIP are fourth-generation products that come with zero to negligible policy allocation or administration charges and that too at premiums that you can afford. However, before you purchase a policy, you need to understand the precise features of ULIP premiums, how it impacts your policy and the various terms and conditions that are associated with it.
Here are a few points that can help one understand the terms and conditions associated with ULIPs:
- Premium allocation charges (PAC): Premium allocations charges are generally considered to be front-loaded charges. Here, a fixed percentage of your ULIP premiums are deducted as charges towards allocating the remainder of your premium towards the equity, debt or balanced funds of your choice. The premium allocation charges levied are higher towards the initial years of your policy and taper off towards the end. Your allocation charges may vary depending on the amount of your premium, the frequency of premium payment (paid per month or year, etc), and mode of payment.
- Taxation: Tax deductions up to a maximum of ₹1.5 lakh can be claimed on ULIP premiums paid in a year, as per Section 80C of the Income Tax Act. However, to avail of these tax benefits, the premiums paid should be less than 10% of the sum assured or 20% of the sum assured, depending on whether the policy was bought before or after April 2012, respectively. Additionally, Section 80C stipulates that regular premium payment lasting the entire lock-in period of 5 years is essential to avail tax benefits, failing which the premium is added to your income and taxed accordingly.
- Top-up Premiums: Some of the best ULIP allow policyholders to invest an additional sum of money (known as a top-up premium) over and above their regular ULIP premium. The top-up premium is generally only used towards your ULIP’s investment component and not towards its insurance component. The premiums paid towards topping up your ULIP should not exceed a certain percentage of the overall premiums paid towards the regular policy. Premium allocation charges for your top-up premiums may range anywhere from 1% to 3%, depending on your insurance provider’s policies.
- Premium redirection: Often, policyholders may find their needs and goals changing over time. One’s investment goals, too, would need to be molded as per their own evolving personal and professional goals. ULIPs allow you to do just that, with the help of the premium redirection facilities. You can redirect your premiums from one fund to another, as per your evolving requirements.
Additionally, since ULIPs are a market-linked product, it is crucial that one gauges market movements and aligns their investment strategies in order to make the most of these movements. You can switch between equity and debt funds as per changing market movements and your risk appetite. When redirecting your premium, you will likely incur certain charges, known commonly as premium redirection charges.
- Minimum Sum Assured: The Sum Assured is the payout doled out to the policyholder’s beneficiaries upon the death of the policyholder. A minimum sum assured is the minimum ratio of premiums to sum assured permitted by the IRDAI (Insurance and Regulatory Department of India). Opting for a lower sum assured would entail the lowering of your insurance cover, while maximizing the amount invested in equity or debt funds. Currently, one can opt for a sum assured that is a minimum of 7 times their yearly premium. Earlier, only those 45 years and above could opt for a minimum sum assured of 7 times their yearly premium, but late last year the IRDAI announced that even those below 45 years can avail of this provision. One should note though, that even though opting for the minimum sum assured would likely maximize one’s returns from the market, it would result in no tax benefits on premiums for the policyholder.
Conclusion: Thus, these terms can help you understand how choosing the right premium amount has a direct effect on your policy and the benefits available to you. Once you’ve thoroughly understood the terms and conditions of premiums associated with ULIPs, you can consider investing in the Invest 4G plan from the Canara HSBC Oriental Bank of Commerce. The Invest 4G plan allows you a choice of as many as 7 fund options and 4 strategies to customize your portfolio. Apart from this, you can switch funds, redirect them and opt for partial withdrawals to take care of a financial emergency as well.