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What is a ULIP and is it a good form of investment?

dateKnowledge Centre Team dateJanuary 21, 2021 views157 Views
What is a ULIP and is it a good form of investment?

Once a person starts their family and settles on a job or business, they have secured their present. They are now confident that they can fulfil their family's needs while making sure that they are financially independent and sufficient. The next step will be to secure your and your family's future. One can never know what might happen to them in the future. From accidents to economic fall-outs, several possibilities can leave one in a state of financial despair.

One needs to ensure that their children are well-educated and have the funds to achieve the educational heights they dream of. Finally, after ensuring that one has saved enough money for the future, they need to make financially smart decisions and invest in plans that give them returns on their money.

It may sound a lot for someone who is just starting their life with their family. However, various banks and life insurance providers give you a straightforward option to help you achieve all these financial milestones through a single plan.

What is a ULIP Plan?

Unit-linked Insurance Plans (ULIP) works as an accumulation of insurance and investment. They protect your family's future and provide interest in your money for wealth creation over time.

In a ULIP investment, a part of your premium is separated for insurance while the other part is invested in the market. A professional investor will carry out the investment corpus and get you various fund options while choosing a ULIP. These options provide you with the choice of debt and equity funds.

You can select the choice of debts and equity funds as per the financial goals of a person. If you want a secure future, then you can choose to have higher insurance. Though, if your goal is to create wealth through investment, you can choose equity funds.

When you invest your funds for a length of time, such as ten years or longer, you can accumulate wealth. No matter if you are a risk-taker or a conservative investor, the ULIP investment plan consists of options that can accommodate all kinds of features.

You can opt to pay the premium for a ULIP investment monthly, yearly, or in lump-sum.

Features of a ULIP Investment Plan

The following features make ULIP Investment unique from other options offered by insurance companies. These key features are customizable as per the needs of the policy-holder.

Funds

The most important feature that makes ULIP investment different from other options is the various kinds of funds you can choose from for your investment planning. At Canara HSBC Oriental Bank of Commerce Life Insurance, you get the following options for funds.

  • Debt Funds: For the people who are low-risk oriented, debt funds can be the perfect option. In debt funds, a lesser fraction of your premium will be invested in the market, decreasing the risk. Although, it also decreases the number of returns that one can get from the investment.
  • Equity Funds: In equity funds, market volatility risk is high, and the investment is made in the equity stock market. Through equity funds, you will have a higher chance of getting higher returns.
  • Balanced Funds: This option provides you with a balance between equity and debt funds. You can opt for higher returns with minimal risk possible.

Life Cover

ULIP investment is, by definition, a life insurance plan. The life cover that is assured and signed at the beginning of the plan is guaranteed to be payable in case of demise of the policy-holder.

Here are some of the life cover features that one should know about before they sign up for a ULIP investment plan.

  • Charges: When you pay the insurance company's premium, it will include various charges, including premium allocation charges, fund management charges, mortality charges, and others.
  • Switching: You may decide to opt for equity funds initially and then may want to switch to debt or balanced funds. Through a ULIP investment plan, you get the freedom to switch between the different kinds of funds.
  • Top-Up Premiums: You can choose to make an additional investment in the market by paying a top-up premium above the fixed premium. The benefits you receive from the investment are exempted from tax deductions under Section 80C of the Income Tax Act, 1961.
  • Partial Withdrawal: Just like you can make an additional investment, you can withdraw the returns partially during your insurance plan's tenure. After the plan has crossed a certain level of the lock-in period, you are free to withdraw a definite sum of returns to address any urgent financial need.

Why invest in a ULIP Investment Plan?

Now that you have understood the properties of a ULIP investment, the next step is to find your reason behind picking the plan. Here are the benefits that you can avail yourself of from a ULIP.

  • Long-term benefits: The one thing that most people forget while investing in the market is patience. Investment is a long term game. One needs to make sure that they do not make any hasty decisions. The lock-in period that comes with the terms of a ULIP ensures that you are investing long term. Long term investments equal substantial benefits, whether you pick debt or equity funds.
  • Flexibility: You can mould the ULIP as per your needs. Whether you want to take risks or not, how much premium you want to pay, the regularity of premium payment, etc. gives you the freedom to make sure that the plan fulfils all your financial needs. You also get the option to switch the funds during the term of the ULIP.
  • Tax Benefits: The returns and benefits you receive from the ULIP are eligible for tax benefits as covered under Article 80C of the Income Tax Act, 1961.
  • Insurance: You accumulate wealth during the term of the ULIP and secure your future with the insurance provided under the plan. The cover depends upon the amount of premium that you choose to pay.

Charges of ULIP Investment

The following points explain the ULIP charges. These charges are different for different insurance companies. One should know these charges before they sign up for the plan. Make sure that you take them under consideration while calculating your return benefits.

  • Fund Management Charges: A professional investor manages your investments. In a ULIP investment, the fund management charges are included to pay the investor for their services. If you have chosen equity funds, then the fund management charges will be higher than debt funds.
  • Mortality Charges: Each month, some of the units are cancelled to cover the mortality charges. The mortality charges are payable as the ULIP. These charges depend upon the health, age, occupation, and habits of the policy-holder.
  • Premium Allocation Charges: This is the most common charge that is applicable in most policies. They are added to pay the marketing and underwriting expenses. Premium Allocation Charges will be paid before one begins to invest.
  • Policy Administration Charges: For the insurance company's administration and management services, they deduct a policy administration charge.

How to apply for a ULIP Investment Plan?

We hope that the information provided above could walk you through the ULIP investment’s essential details. You must now know the process through which you can decide whether getting a ULIP for you is beneficial, and if yes, how can you customize it to suit your needs. Read on to know the steps to follow to apply for a ULIP.

Step 1: Define your life goal. The first step before buying any insurance plan is to define why you need to buy it. Once you know the exact needs you need to address it in the future; you can assess the various plans available under ULIP.

Step 2: Go through the website of the insurance company and compare the various plans offered. You will need to consider your age, gender, occupation, and health history to decide the best one for you.

Step 3: After this, you will need to click on the plan and enter your details in the online form as required.

Step 4: Make sure you calculate the interest rate and returns you will get upon the plan's maturity. If you are satisfied, you can proceed and choose the premium and frequency of its payment.

Each family needs to ensure that they secure the future of their loved ones and that they are never in need of money if the family's breadwinner is not there to support them. The ULIP Investment can help you cover it all while also helping you to accumulate wealth.

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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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