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Is the Risk Involved in ULIPs the Same as Equity Shares?

Is the Risk Involved in ULIPs the Same as Equity Shares?

People who are solely dependent on their income for their well being are more likely to face financial crisis in case of an unfortunate event. You can generate wealth and live a peaceful life through financial planning. All you have to do is to put some money in an investment channel that ensures the financial security of your family while keeping your financial needs in mind.

So if you want to grow your wealth within a certain period, then a savings investment is the option for you. But, to initiate this, your first need is to choose the right investment option. Though there are numerous investment channels available in the market, if you are a beginner, then it's good to invest in a risk-averse option.

What is a ULIP?

ULIP, also known as a Unit Linked Insurance Plan is a market-linked investment product that allows you to invest money across multiple asset classes. As compared to other traditional life insurance plans, ULIP is different as it is linked to risk factor. This savings-cum-protection plan is considered as the best investment option among investors as it helps you to maximize your savings by investing money in multiple investment funds. Although, before investing in a ULIP plan, you need to understand that these funds are based on the stock market investment. Therefore, they are prone to risks and affect the return on investment with the market fluctuation.

The kinds of investments a ULIP offers:

The good part is that you get to choose from different types of funds and switch between them as per your needs. You can just assign the amount of your savings to these funds as per your risk appetite. The types of investment funds include - debt funds, equity funds, and balanced funds, among others. If you are reluctant to take risks, then you can invest in debt funds as they involve less risk. On the other hand, equity funds are liquid in nature. Equity Funds or growth funds are ideal for generating long-term returns. So if you are ready to take risks, then investing in equity funds can be a great option. As it will help you get good returns when the market performs well. Equity funds usually deal with company shares and have a good growth rate and are riskier among other asset classes.

Although, before investing in any of these shares, you need to evaluate certain things. The allocation of equity/debt funds varies across companies. Also, you have the right to choose your fund as per your risk appetite. And the return you get from investment depends majorly on the type of fund you choose. ULIPs also provide you with the flexibility to choose and switch funds between debt and equity for no or little extra cost. Like if the market is performing badly, you can invest in debt funds, but if the market is performing well, then you can switch from debt funds to equity funds. On the whole, the risk factor in case of ULIP investment depends totally on the market conditions. Therefore, you need to be updated on the current market scenarios so that you are well aware of the trends and can switch funds accordingly.

Besides, if you are planning to invest in ULIP plans, then you can choose to go with Invest 4G Plan by Canara HSBC OBC Life Insurance. This plan not just helps you to save for your future financial goals, but also offers the protection for life at competitive charges.

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In order to understand ULIP NAV, you first need to understand how ULIPs work. In ULIPs, a portion of premium from different investors is accumulated to create one investment corpus. This money is invested in several different market instruments. So to divide the returns properly among all the investors, the fund manager divides the net asset value in to small units with a specific face value. NAV is the per market share value of a fund. To better understand the definition of NAV, take a look at the formula below -

Net Asset Value = [Assets-(Liabilities + Expenses)] / Outstanding Units

It's not risky to invest in ULIP if you chose a safer path. Risk factor in ULIPs depends on the investment option you choose. If you are not okay with sharp movements, then choosing a low risk investment is a better idea. For people with high risk appetite, it's good to choose equity funds while risk-averse investors can go for debt funds.

You can opt for settlement option if you want to take your fund value in periodic installments. With the settlement option, you can get your maturity amount in installment as per the frequency chosen by you over a maximum period of 5 years. You can choose complete withdrawal of fund value at any point of time. Although, you will not get any life cover during this period.

ULIPs are life insurance products that provide paths to invest. And just like other investment option, there's no guaranteed investment return in a ULIP. Although, if you like taking risks and want to earn more returns on your investment, then opt for equity funds.

At the time of maturity of ULIP policy, you will get the fund value on your prevailing NAV. Fund value is the number of units of policy multiplied by NAV (net asset value).

Value of the fund = Total units of policy x NAV (Net Asset Value)

Well, discontinuing your premium payment will disrupt your savings as well as financial goals. In such case, you can approach your insurance company and ask for the revival of discontinued policy within the stipulated timelines. Also, you will have to pay all the unpaid premiums.

ULIP plan is a combination of investment and insurance. Thus, one must hold this plan for a duration of at least 10 years so as to get investment benefits out of it. As an early exit will have its own consequences. ULIPs have a lock-in-period of 5 years. Thus, you may surrender your policy before the completion of 5 years, but you will be paid only after the end of 5 years.

Generally, minimum lock-in period for ULIP is 5 consecutive policy years. During this time period, if the policyholder discontinues or surrenders the policy, then he/she will not able to receive any payouts. Withdrawals are only allowed at the end of the lock-in period. In addition to this, if you surrender your policy before the lock-in period ends, then you will have to pay surrender charges as well. Also, it is advisable not to exit your plan after the completion of 5 years of lock-in period, because if you stay invested for a longer duration it will help you reap better benefits.

The amount that you pay towards the Unit Linked Insurance Policy is eligible for tax deduction as per Section 80C of the Income Tax Act, 1961. This means that the premium amount paid will be deducted under section 80C from your taxable income up to a maximum limit, which is currently ₹1.5 Lakhs. However, the aggregate amount of deductions under section 80C, section 80CCC and 80CCD (1) shall not, in any case, exceed ₹1.5 Lakhs. Also, upon the maturity of the policy, the payout amount you receive will be exempt from income tax, subject to the applicable provisions of Section 10(10D) of the Income Tax Act, 1961.

Here’re the following major benefits of buying ULIP

1. Tax Benefits – It helps you to reduce tax liabilities. This means you are liable to enjoy tax benefits on the premiums paid towards the policy as per Section 80C of the Income Tax Act.

2. Long-term growth– One of the major benefits of buying a ULIP plan is that it offers long-term benefits. ULIPs come with a lock-in period of 5 years which will keep you invested for a longer period.

3. Dual benefits – ULIPs not only offer life coverage but also come with a wide range of investment funds that will help you earn great returns. This includes balanced funds, debt funds or equity funds. You can invest in any of them depending on your need and risk appetite.

4. Flexibility – It gives you the flexibility to switch between funds basis your risk appetite. You could select multiple funds and different investment strategies.

5. Partial withdrawal option – It allows you to make partial withdrawal in case of any uncalled medical emergency or contingency after completion of lock-in period.

ULIP is a perfect investment option if you are looking for long term wealth creation. It could be buying your own house, a new car, going on a long vacation, or your child’s higher education or marriage, ULIP helps you to meet all your long-term financial goals. Moreover, it comes with a lock-in period of 5 years which keep you invested for a longer period and helps you earn better returns. The lock-in period is calculated from the date when the policy is issued.

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