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Why Are ULIPs Considered A Tricky Investment When They Are Not

Why Are ULIPs Considered A Tricky Investment When They Are Not

Perceptions play a critical role in human decision making. People take important decisions based solely on perception, but the reality is often very different. In the world of financial products, perceptions can have a significant impact on the acceptability of a product. Due to a lack of financial awareness in India, most financial products suffer due to misplaced perceptions.

Among the plethora of products available in the market, no financial product has been negatively impacted more than unit-linked insurance plans or ULIPs. Even though ULIPs are one of the best investment options, they are considered to be a tricky investment and that too without any factual reasons. Various factors are responsible for the negative perception, but let us try to clear the misconceptions.

Combination of products

If anyone wants to secure his/her family's financial future, he/she will most probably opt for a term insurance plan as they provide substantial cover at affordable rates. In a different scenario, if anyone wishes for capital appreciation, he/she will invest in an equity mutual fund. Mutual funds are known to provide decent returns in the long run. But what if you get both the features in a single product?

Most people get confused because ULIPs are a combination of insurance and investment and provide the best of both products. You can secure the financial future of your family with life cover and get the benefits of capital appreciation at the same time with ULIPs. Since ULIPs are insurance-cum-investment products, many people analyse them on the parameters set for either of the two products and get confused

Even though ULIPs are a combination of investment and insurance, they cannot be treated as an insurance or an investment product. The best ULIP provide adequate flexibility and you can choose to use it as an insurance or an investment product. If capital appreciation is your primary target, choose a ULIP with small life cover and opt for an equity fund. ULIPs levy a mortality charge for providing the life cover, which can affect the overall returns in the long-term and so you can opt for a small cover to boost your returns. In such a manner, you can customize your ULIP as per your financial needs and goals.

Tenure

There may be a lot of misgivings regarding the tenure of a ULIP. ULIPs use a part of the premium to provide life cover, while the balance is used for investment. People opting for a term plan take the policy for 20-25 years depending on the time left for retirement. Term plans are long-term investments, but as the premiums are affordable, they do not require substantial resource allocation. The tenure varies significantly for people investing in equity products.

Depending on the financial goal, people invest in equity products for 3 to 10 years or even more. Since ULIPs are a combination of insurance and investment, the optimum tenure varies. You can't expect an ultra-short tenure like ELSS or some equity funds boast of, nor do you have to compulsorily commit for 20-25 years. Even though it is better to remain invested for the long term, if the financial goal demands, you can opt for a 15-year tenure. Many people invest in ULIPs with the target of getting returns similar to short-term equity products and get disappointed.

Cost

There are various costs associated with ULIPs like fund allocation charges, premium management charges, mortality charges, etc. Multiple charges have led to a perception that ULIPs are costly products. People also find it hard to comprehend the impact of the various charges. However, the reality is starkly different. Even though there are a host of charges, the maximum fees have been capped by the Insurance Regulatory and Development Authority of India. The annual charges have been capped at 3% for 10 years and 2.25% for policies with a tenure of more than 10 years.

Conclusion

The best ULIP offer individuals the option to choose from a variety of investment funds and several portfolio management strategies. If the financial aim is clear, opting for the right combination of funds and strategies would not be difficult. The Invest 4G unit-linked plan from Canara HSBC Oriental Bank of Commerce Life Insurance provides flexibility to the investor along with simplicity. With 4 portfolio management options and 7 different types of funds, potential investors can take an informed decision in a transparent manner

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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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