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Should You Invest In New-Age ULIPS?

Should You Invest In New-Age ULIPS?

ulip plans as investment

ULIPS (Unit Linked Insurance Plans) is a product offered by life insurance companies which provide a combination of investment and insurance. This makes the product a goal protector on two counts- both by investing for a life goal when you survive the policy period or when you are no longer alive, benefitting your nominee.

Previously, Unit linked insurance plans had been subject to much bad press because they are expensive. However, the dedicated push by the Indian insurance regulatory authority, IRDA has helped in lowering charges substantially. For making ULIPs competitive in the market, particularly in comparison to ELSS (Equity Linked Savings Scheme), many insurance companies have launched fourth-generation ULIPS’s which have no policy administration or policy allocation charges. The charge for fund management is the same as that for ELSS.

How They Work

Because a ULIP plan has an investment component along with insurance coverage, part of the premium is used for life cover and expenses like fund management charges, while remaining is invested in debt, equity or hybrid (mix of both) based on the type of ULIP.

You can switch among funds in case you think that the fund has not been doing well. However, if you close your policy within 5 years, you will have to cough up Rs 6000 to the insurer as ULIPs come with a 5-year lock-in period.

After 5 years, you can withdraw funds partially or totally to foreclose your policy. But expert’s advice to stay invested for at least 10 to 15 years for earning attractive yields on your investment. Hence it is good to go for a ULIP if you have a long-term horizon to invest and are confident of paying premiums for the complete policy tenure.

Features of ULIPS:

  • Death benefit: The minimum death benefit guaranteed by a ULIP is called as the sum assured. The insurer will provide value to the fund if it grows bigger than the sum assured. Some policies provide fund value along with sum assured. But such policies charge more premium.
  • Maturity benefit: At the conclusion of the policy term, the life cover, which is the sum assured ceases to exist, and you will receive only the fund value as maturity benefits. When the policy matures, apart from lump sum pay-out, you will also have the option to select regular pay-out, like annually, monthly, half-yearly or quarterly.
    Some insurers provide loyalty additions to the investor in case they are in the fund for a longer period of time- typically 10 years or more.
  • Cost is vital: When you consider product structure and charges, ULIP seems to be costly. But in case of most 4G ULIPs, they have done away with such charges. The cost structure varies based on the insurer and kind of ULIP.

Charges on ULIPS

The standard charges and fees of ULIPS include:

  • Premium Allocation Charge: A major chunk of premiums paid in initial years is counted as initial and renewal charges apart from the commission of agents. But many 4G ULIPs have got rid of such costs. You must check this before you purchase a ULIP.
  • Mortality charges: This covers the cost of life insurance. It is based on age and sum assured and are deducted on a monthly basis. When your investment grows, the risk value comes down for the insurer and therefore, the mortality charge comes down gradually.
  • Fund Management Charges (FMC): These are the charges which are charged by the insurer for managing funds in the ULIP. It is deducted before arriving at Net Asset Value (NAV) and is adjusted from NAV on a daily basis. The maximum FMC permitted is 1.35 % of the fund value, every year and is charged daily. As such, FMC’s of such new-age ULIPs match those of ELSS
  • Charges for Policy Administration: These are charged on a monthly basis and levied for the administration of policy. Majority of new-age ULIPs do not charge this amount. So, ascertain from the insurer before purchasing a policy.
  • Charges for fund switching: There is a limited number of free switches of funds available with insurers but a sum of Rs. 100 to Rs. 200 may be charged on subsequent switches.
  • Charges for partial withdrawals: Certain plans provide unlimited partial withdrawals, while others have a limit of 2 to 4 times.
Benefits of ulips

Riders to The Policy

With the clause of waiver of premium on the demise of the policyholder, he can ensure that the policy is used only for its long-term purpose. The future premiums are waived off and are paid by the insurer itself along with a lump sum payment at the time of death. Also, the total corpus built over the years is paid to the nominee when the policy period is over. This feature is valuable for persons who wish to keep their family financially secure in the event of their demise.

The rider for waiving of the premium is also applicable in the event of accident, critical illness or permanent disability. It ensures that all future premiums towards your ULIP policy will get waived and your life cover and investment will continue without hindrance.

Reasons to Invest in ULIPS

  • Flexibility for fund options: Most ULIPs come with a range of options for debt, equity and balanced funds. You can invest as per your risk appetite and needs for finance. ULIPs also enable you to move your money across various funds for gaining maximum returns.
  • The flexibility of Life Cover: ULIPs provide you with the flexibility to select your sum Assured at the start of your policy. Also, some ULIPs permit you to raise your sum Assured over the term of the plan to satisfy your protection needs at various stages of your life.
  • Flexibility of Premiums: ULIPs also permit you to pay a top-up amount, over and above existing premium. This option can be used to maximize returns on investment.
  • Flexibility of rider: Riders are optional features for customizing your ULIPs and gain additional protection. One common rider is a unit-linked rider for accident and disability benefits.

These are all some of the reasons why it is attractive to invest in ULIP insurance.

Speak to an insurance specialist now!

FAQs

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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