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The Young Professional's Guide To ULIPs in India

The Young Professional's Guide To ULIPs in India

About 440 million millennials in India form 34% of our population and 46% of our workforce. Ours is the largest millennial population in the world. They are currently driving the consumer economy with their product and service purchases. But do millennials save and invest?

Yes, they do. One-third of working millennials put their money only in risk-free investments. They take lesser risks than their older counterparts do in terms of their hard-earned savings. This generation is bringing about a change in the economy. In this scenario, a ULIP would be a safe enough investment plan for youngsters that still takes them one step further from fixed-income savings instruments. Here's an Indian millennial's guide to ULIPs

What is a ULIP?

A Unit Linked Insurance Plan is a unique plan that is part-insurance and part-investment. Your monthly premium payment is partly used for a life cover. The other part is invested in funds selected as per your risk appetite and your financial goals. Since it takes time to accumulate a large corpus of savings, this is a good way to discipline yourself into saving regularly.

Who should invest in ULIPs?

Specific goals

As a young, ambitious individual, you must have a lot of goals for your future like buying a house, a vehicle, your wedding, higher education, etc. A ULIP plan is a good option for you if you wish to remain invested for a long period of time for fulfilling these goals.

Different risk appetites

ULIPs are flexible in terms of choosing and switching investments. The portion of equity in your investment can vary from 0% to 100%. As compared to instruments like fixed deposits, ULIP offer advantages like life insurance cover, guaranteed bonus and better returns.

Keeping track of markets

A ULIP requires you to keep track of markets so as to check how your fund is performing, and decide how to switch allocations. If you are ready to stay updated, ULIPs are for you.

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What's the best way to buy and manage a ULIP?

The best way to buy a ULIP for tech-savvy youngsters is online. You can conveniently pay your premiums online as well. You can easily keep track of market movements and switch your investments, manage your funds- all online. A great option that you can check out is the Canara HSBC Oriental Bank of Commerce's Invest 4G plan. It offers advantages like partial withdrawals for meeting emergency expenses, and return of mortality charge upon maturity.



What are the charges for a ULIP?

There are various charges for a ULIP which get deducted from your premium. The number and amount of charges depends on who your insurer is. These include administrative charges, fund management charges, surrender charges, mortality charges, partial withdrawal charges, switching charges, etc.

What are the tax benefits of a ULIP ?

In an age when they have just started paying taxes and are learning how to save them, a ULIP is a great investment plan for youngsters. Premiums are tax-deductible upto a limit of Rs.1.5 lakh under Section 80C, while maturity amount is exempt under Section 10(10D) of the Income Tax Act. Moreover, ULIPs are one of the few instruments to be exempt from the Long Term Capital Gains (LTCG) tax.

What are the other benefits of a ULIP?

  • ULIPs are the ideal investment plan for youngsters because they offer flexibility in payment of premium i.e. monthly, quarterly, semi annually, etc.
  • They offer you the power of better returns through compounding, which means that profits are reinvested for greater profits in the future.
  • They offer the flexibility to switch between equity to debt to balanced funds at almost any given time based on the performance of your funds
  • They have a 5-year lock-in period, but the actual benefit of ULIPs is derived when you stay invested for a really long period. It inculcates the habit of saving and persisting to save.
  • Investing in a ULIP at the very beginning of your career would help you realise your dreams at an earlier stage in your life. That dream vacation in your 30s might actually be possible with a good investment plan.

For your first ULIP, you might want to consider the Invest 4G plan from the Canara HSBC Oriental Bank of Commerce. It offers excellent advantages like 7 different funds and 4 portfolio strategies. You can also boost your savings through Loyalty Additions and Wealth Boosters.

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Annual Income (In Lacs)

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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