The fundamental purpose of picking a successful investment product is to receive the coveted returns. ULIP or Unit Linked Insurance Plan extends an array of advantages and is one of the most backed investment decisions if taken accurately. ULIP works like any other standard insurance policy where you will be required to make the payments according to the policy schedule.
What is a ULIP?
ULIP is an integrated monetary product that extends the best of both the divisions – investment and insurance. Fundamentally, ULIP or Unit Linked Insurance Plan is a composite product administered by insurance companies that gives the twin advantages of security and wealth appreciation. Being a market-linked investment product, ULIP provides its investors’ with opportunities to profit from the capital market. ULIP is structured uniquely when correlated to other insurance products given by the insurance providers. Past performance suggests that ULIPs have usually given a return of 12-15% for long-term investments. Returns from large-cap equity mutual funds have also rendered similar returns over the long term.
How does a ULIP operate?
ULIP or Unit Linked Insurance Plan is known as a market-linked investment plan. It is devised to benefit both risk cover and wealth creation by earning a return on market investment. When invested in a ULIP, an insurance plan, you will make premium payment as stipulated by the product or plan.
The sum invested in the form of the premium is then balanced against the relevant charges mentioned beforehand. A part of the net premium is put down for rendering life cover (which is also subtracted as mortality charges). The other part invested in the capital market through funds comprising equity, debt and money market instruments in varying proportions. Depending upon the plan alternatives and fund choices made available by the ULIP, you can make your investments bearing in mind your risk profile. Each fund will hold a risk rating. ULIPs come with a lock-in duration of 5 years.
When it comes to the ‘investment’ part ULIP pools investors (policyholders) funds and reinvest them into funds chosen by them. The entire corpus of the funds is segmented into units. The units will be allotted to each policyholder in the proportion of an invested value.
Post maturity of the ULIP, the investor will obtain the fund value on the date of maturity. The fund amount is the total cost of all the fund units across all the investment funds opted in the policy. In case, investor expires during the policy period, then the nominee chosen in the policy or the heir of the policy will get the following amount:
- Fund amount on the date of death
- Sum guaranteed (pre-agreed)
- 105% of cumulative premiums paid till the date of death
Who can invest in a ULIP?
Although ULIP extends flexibility to the investor, it is fundamentally a long-term investment product. ULIP is excellent for investors of any risk profile and people looking for extra insurance cover and market investment possibilities. ULIP invests in the capital market. However, the investor needs to have convenience and flexibility to pick based on the risk profile and the basis of particular financial goals. ULIPs are well suited for investors with long-term and medium financial goals such as higher studies, retirement, dream holidays, etc. In short, ULIPs are suitable for:
- Investors holding medium-term and long-term extents for investment
- Investors of any risk profile
- Investors of all age across all life stage
- Investors seeking risk cover along with an investment
- Investors who would wish to monitor their investments closely.
How to find the Best ULIPs?
Receiving the best possible returns are of any investors purpose. ULIPs can be a transcendent choice to maximise your returns and generate wealth over the long-run for meeting your life goals. As the product is structured uniquely to render the triple benefit of life protection, wealth creation along with tax efficiency, ULIPs can be an ideal choice for investors of any risk profile and at any life stage. However, certain things to consider while making the apt choice among many ULIP options available in the market. Given are the things to keep in mind while choosing the most suitable ULIP:
- Get the appropriate amount of life protection
ULIPs being an insurance product secures your family by extending life cover. This life cover is provided to ensure that your loved ones are financially secured, even when you are not around. Ten times of the ULIP premium can be used as minimum life cover. Along with complete protection plans that you already hold, you can get some extra coverage through ULIP investments. It is necessary to read your coverage terms and conditions before you invest to suitably cover you.
- Determine your investment goals
It is essential to plan your investments prudently to accomplish your life goals. Be it your life post-retirement or your child’s vision of becoming a doctor or purchasing your dream; each life event must be outlined carefully. It’s important to establish your goals and start making investments respectively as you get the precision on the time limit and the estimated funds you require to meet the goals. You can pick the ULIP that suits your goals in each parameter.
- Know your risk-taking capacity and choose funds accordingly
Risk-taking ability is the essential factor to be examined when making ULIP investments that are market-linked. It is a well-known phrase that higher the risk higher is the repayment. Also, at a young age, one can manage to take comparatively more risk. To be aware of the risk capacity it is necessary to choose the best fitting ULIP and determine the most suitable investment capital. There are also fund switch choices offered by ULIP. Contemplate the number of free switches available so that you can switch from one fund to another depending on the market situation and your dynamic needs.
- Estimate the fund performance and financial steadiness of the insurer
While determining the ULIP, review the fund performances of the ULIP you have taken. Specifically, the consistency of fund performance must be examined to learn how the fund reacts to market fluctuations. Although the preceding performances are not the implications of future performance, it gives you an impression on what to anticipate. Likewise, it is also vital to examine the insurance provider’s financial soundness and solidity while picking ULIP by glancing at the solvency ratio.
- Compare on the cost-benefit grounds.
ULIPs are available with attractive features and advantages such as riders, top-ups and numerous more. It is important to analyse the characteristics of various ULIPs alongside their cost as it can assist you in making a smart purchasing choice.
- Kinds of ULIP Plans in India
ULIP can be classified on the grounds of mortality benefits, the purpose of investment and fund alternatives.
1. Type I ULIP: In this type, the policy returns the higher amount of fund value or sum guaranteed as a death compensation to the nominee, on the death of the policyholder.
2. Type II ULIP: In this type, the policy pays the amount assured + fund value as the death benefit to the nominee, on the demise of the policyholder.
Reason to invest in ULIPs
ULIP investment comes with various advantages. People of any life stage with any risk profile can count on ULIP for their long-term monetary goals. Some of the significant reasons to invest in ULIPs are as follows:
- To maximise returns
ULIPs are market-linked products, wherein you can decide to invest in diverse financial instruments through fund options available. Based on your risk profile, you can prefer to invest in a debt fund, equity fund, balanced fund or cash fund. Depending on your preference of fund and the risk category, your returns will range. You are also entitled to switch from one fund to another throughout the policy cycle. As the investment is market-driven, there is a possibility to maximise your returns based on stock market performance.
- For life protection
As ULIPs are combined products, life protection is fundamentally offered simultaneously with an investment factor. With the mortality benefits, ULIP ensures the family of the assured/investor is financially stable even when the assured is no longer around in this world.
- To accomplish long-term financial goals.
Investments in the capital market through ULIP can gain better in the long-term and help the investor achieve several long-term objects such as retirement, higher studies and marriage etc.
- For tax advantages
Besides every other advantage, the tax benefit is eye-catching for many people. ULIPs is a transcendent way to diminish tax outgo as the premium paid fits for tax deduction under section 80C of the Income Tax Act, 1961.
Choosing the best ULIP is essential, and to pick the right ULIP, one must assess his or her obligations and ability to handle risk. ULIP strikes a great equilibrium between insurance and investment. It helps you guard your family, obtain long-term financial goals and maximise your returns.