Whether you invest or not, you must have heard of Unit Linked Insurance Plans or ULIP. These unique investment-cum insurance products have come a long way in India. Before getting into trends and updates, let us have a look at what a ULIP actually is.
In a ULIP, a part of the premium is utilised for a life cover, while the other part is invested in various market funds chosen as per your risk appetite and investment horizon. ULIPs are unique not just in their structure but also in terms of returns. On one hand, you have the security of a life cover which will provide for a payout in the event of your death. At the same time, you can also grow your wealth with steady returns from your investments.
As an investment option, ULIPs have faced a rollercoaster of a journey. Their share in the total new premium declined to Here’s a look at the major ULIP trends from the past year.
One of the main concerns with ULIP investments earlier was that the life insurance cover will eat into one’s investment returns. This concern was addressed by insurers offering return of mortality charges. Mortality charges are basically the charges that your insurer deducts for providing you the life cover. A lot of insurers have begun a practice wherein the total amounts of mortality charges deducted are added back to the fund value upon maturity.
What are mortality charges in ULIP?
In Budget 2018, a Long Term Capital Gains Tax was introduced on stocks and equity funds. ULIPs, being insurance tools, were spared from this tax. This gave them an edge over mutual funds, ELSS, and a lot of other investment options. This, coupled with ROMC, only gave ULIPs an edge not just as tax-saving instruments, but also as investments offering good returns.
Another important reason for a number of investors being averse to ULIPs was that there were a host of charges associated with the investment. These mostly included the following.
Due to the rising demand of ULIP, a lot of fund houses began cancelling the numerous charges associated with the plans and instead, began increasing the scope of returns for investors. Earlier, comparison of fund performance for selecting ULIPs was futile because of the plethora of charges. With online ULIP investments carrying minimal charges, investors find it easier to compare and make informed choices.
ULIPs are more flexible, and more promising. Especially if you are a new investor, they can be a great place to begin with the right balance of potential returns and safety of investments.
1. A ULIP offers you the best of both worlds- investment and insurance. It eliminates the need for handling two different instruments at once.
2. It is very easy to switch and redirect your investments with a ULIP. You can switch them almost anytime you feel like your chosen fund is not performing well or is too risky or too safe.
3. Although ULIP investments are ideally long-term investments, you can exercise partial withdrawals when you are in urgent need of funds. This only adds to the flexibility of ULIPs.
4. They are great for long term financial goals like education, buying a house, marriage, etc.
Canara HSBC Oriental Bank of Commerce Invest 4G plan is a protection and savings-oriented ULIP which provides you with an amazing scope of options that includes 7 different fund options, 4 different portfolio strategies, and 2 different death benefit options. The icing on the cake is Loyalty Additions and Wealth Boosters. The best part is that this investment package is just a few clicks away.
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 -
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).
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.