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What Are The Top Disadvantages of ULIPs?

What Are The Top Disadvantages of ULIPs?

Life Insurance Policy For Unmarried

ULIPs are becoming more and more popular as investment options. They are popular due to many reasons. They are a combination of investment and insurance, all in one plan. They also offer multiple tax benefits. If you want to make your first investment, a ULIP could be the best choice as it offers a good amount of flexibility for minimizing risks.

What is a ULIP?

A Unit-Linked Insurance Plan is a combination of life insurance and investment. A part of your premium is invested in funds of your choice, while another part goes towards a life insurance cover. You are allowed to switch and redirect your funds often in search of better returns or greater safety. You can invest in equity, debt, or balanced funds as per your risk appetite.

Disadvantages of ULIPs

Like any other investment product, ULIPs come with their own set of disadvantages. Here are some of the major negatives that you could notice about a Unit Linked Insurance Plan, which are important to know especially if it’s your first investment.

Complexity

Since a single ULIP is both a life insurance cover and an investment, it might be quite a lot to comprehend for new investors. We are used to one instrument having a single focus and purpose and focus, be it savings, investment, or insurance. Plus, the sheer amount of charges involved might intimidate you as well. While being updated with your insurance premiums, you also need to keep track of your fund NAVs and make constant decisions about switching, redirecting, and investing your funds in the right places so as to gain maximum returns out of your ULIP.

Costs

ULIPs generally have a lot of charges associated with them. In the beginning, these charges are more as they go towards policy administration and other aspects of managing your funds. With time the costs increase and your potential returns increase. However, it takes patience. In the beginning, a considerable part of your premium is lost towards charges.

Market realities

Another reason why you earn less from your Unit Linked Insurance Plan in the initial years is that the market is volatile, and you are still learning how to navigate it. You may or may not take risks when needed, prefer to stay rather safe and miss out on potential opportunities of gains.

Lock-in period

ULIPs have a lock-in period of 5 years, before which you cannot withdraw your investments. Even if you surrender your ULIP within 5 years, withdrawal would have to wait until the lock-in period is over.

Switching charges

Most insurers will offer you free switches of your funds up to a certain point. However, after this point switching is chargeable and you really have to weigh your potential profits against the charges incurred.

However…

  • Any investment product is complex, and once you get a proper idea about it, ULIPs can be your best friends. Plus, you will always have a fund manager to guide you.
  • The combination of investment and insurance could also be seen as a blessing to avoid the extra time management efforts required for two different instruments.
  • The costs of ULIPs have gone down massively since the IRDAI (Insurance Regulatory and Development Authority of India) put a cap on them.
  • Plans like Invest 4G offer enough switches for free, so you need not really worry about switching charges.
  • The lock-in period of ULIPs can actually be an advantage if you are really eyeing the long term. In fact, a ULIP will reach its true potential in 10 to 15 years.

Conclusion

ULIPs are not at all bad investment products, if you know how to turn their disadvantages around in your favour. Do some solid research and invest in a comprehensive plan like Invest 4G which offers multiple avenues and great flexibility.

Invest 4G

Canara HSBC Oriental Bank of Commerce Life Insurance's Invest 4G is a ULIP which offers a wide range of choices such as 7 different funds and 4 different portfolio strategies to choose from. It also offers Return of Mortality Charges so that charges don’t eat into your fund value. Additionally, there are also Loyalty Additions and Wealth Boosters for a cherry on top. So, what are you waiting for? The plan for fulfilling your dreams is just a few clicks away!

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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