ULIPs have become a popular financial instrument with investors. This is largely because LIPs offer investors triple benefits of insurance, investment and tax-savings. ULIPs can be used to meet both, long-term goals as well as short-term needs of investors.
What is a ULIP?
A Unit Linked Insurance Plan or ULIP is a plan that's part investment, part insurance. One part of your premium will be invested in funds that are decided as per various factors. The other part is spent on a life cover.
Benefits of a ULIP
ULIPs fall in the rare Exempt-Exempt-Exempt taxation category. (Exemption on investment, income, and withdrawal of investment)
They are the only market-linked investments to be exempt from the LTCG (Long Term Capital Gains) Tax. This gives them significant leverage over instruments like mutual funds.
They are very flexible in terms of switching investments, selecting funds, fund strategies, etc.
The insurance company will invest a part of your premium in equity shares, debt, or both as per your risk appetite and investment horizon.
The remaining amount will be used to provide a protective insurance cover.
Investments will be managed by fund managers.
If you feel that your fund is not yielding enough, you can always switch your investments.
What is lock-in period?
All tax-saving investments have a lock-in period ranging from 3 years to 15 years. There is a lock-in period in ULIP, ELSS, as well as investments like PPF. Public Provident Fund (PPF) has the highest lock-in period of 15 years. ELSS has the lowest at 3 years. You cannot withdraw your investment during this period. At the end of the lock-in period, you can either remain invested or withdraw your investment.
What is the lock-in period in ULIP?
In 2010, the IRDAI had changed the ULIP lock-in period from 3 years to 5 years. This means that before the end of the 5-year ULIP lock-in period, you cannot withdraw any money from your plan.
What happens if you choose to discontinue policy in the lock-in period?
If you choose to surrender your plan before the completion of 5 years, discontinuance charges might be deducted from the fund value.
The amount is then deposited in a discontinuous policy fund.
Even though your ULIP ceases, the amount is given to you only after the end of the ULIP plan's lock-in period.
Why do investors discontinue ULIPs?
Certain investors may discontinue their policy after the end of the lock-in period of ULIP.
They may feel that the funds they have invested in are not performing well and hence choose to invest in other instruments with better returns.
There might be a cash crunch and they may need money for an emergency.
They may have bought a ULIP in a hurry close to the return-filing season and then found it non-profitable in the long run. This could easily lead to termination before the end of the ULIP plan's lock-in period.
They might wish for a more liquid investment and would prefer not to wait till the end of the lock-in period of ULIP.
They might not find the insurance cover adequate and would rather go for a separate insurance policy.
Why should you not discontinue a ULIP even after the end of the lock-in period of ULIP?
Most of the extra charges levied on ULIPs are levied during the ULIP plan's lock-in period. Hence, one’s actual investment in this period is lower, which leads to lower returns. Once these charges are paid, one can start earning a much higher rate of returns.
If your funds aren’t performing well, you always have the option of tracking your NAVs and switching funds.
A ULIP is a long-term investment. The longer an investor actually stays invested and focuses on the bigger picture, the better their investments will fare.
Utilising the power of compounding (interest is reinvested) only works if investors stay invested for the long run.
ULIPs offer a significant amount of benefits to investors and can yield great returns in the long-run. Canara HSBC’s Invest 4G plan comes with utmost flexibility in the form of 7 diverse fund options and 4 useful portfolio strategies to create an investment suited to one’s financial goals. It gives investors a considerable edge with minimal charges and return of mortality charges. With perks like Loyalty Additions and Wealth Boosters, investors’ funds can also gain a great boost.