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.
- They are ideal for long-term financial goals like higher education.
How does a ULIP work?
- 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 Oriental Bank of Commerce’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.