Unit Linked Insurance Plan or ULIP is essentially an insurance plan that extends the dual benefit of an investment option and a life cover. Over the years, ULIPs have emerged as a means to achieve one’s long-term goals while planning towards protecting the financial future of family members so that they can face unforeseen events.
Notably, in ULIPs the premium amount is divided into two parts. The first part goes toward life cover and the rest is parked in the investment fund of their choice. Individuals have the option to choose from debt, equity, or a combination of both to park their money in based on their risk appetite and financial goals.
What are The Types of ULIPs?
Unit Linked Insurance Funds are categorized based on the type of mutual funds linked with them. For instance,
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Equity Funds
The ULIPs park most of the funds toward equity-oriented assets or equity assets like stocks of companies.
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Debt Fund
In this case, ULIP plans to park the premium amount in money market instruments, bonds, debt instruments, government securities, etc.
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Balanced Funds
For this case, the premium amount is parked into a combination of both debt and equity investment options.
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Whole Life ULIPS
Today there is a new variety of ULIPs available in the market, known as whole-life ULIPs or 4G ULIPs. Such Unit Linked Insurance Plans accompany minimal charges and new features, making them new-age ULIPs. A few features of such ULIPs include the removal of return on mortality charges on maturity and charges on premium allocation.
Key Benefits of Investing in Unit-Linked Insurance Plans
Here are the most notable features and associated benefits of ULIP Plans
Freedom to choose a life cover
In ULIPs, individuals have the leeway to choose the amount of Life Cover as per their suitability. Typically, the minimum life cover extended by most ULIPs is 10 times the annual premium amount. Then again, individuals have the option to select a cover amount that’s as much as 40 times their annual premium.
The option to select the investment type
Individuals have the option to choose the investment type in ULIP, i.e., they have a say in where and how the premium amount is invested. They have the option to select among debt funds, equity funds, and balanced funds to park their money in.
This allows individuals to select a fund based on their risk tolerance and investment goals. Typically, individuals who want to generate wealth and have a strong risk-taking appetite are likely to park their money in equity funds linked plans. On the other hand, those who plan on generating steady wealth over the years park their funds in debt funds. You can compare the returns to SIP options by using a SIP calculator and ascertain the merit of ULIPs accordingly.
Flexibility to switch between options
Besides the freedom to choose the type of funds one plans to invest in, ULIPs also allows an individual to switch between funds. Such an option allows them to align their finances as per their changing risk-taking capacity and financial goals. Notably, most insurance providers extend only a fixed number of free switches and may levy an additional fee once you exceed the limit.
It is recommended to check this option and associated charges in advance to ascertain the affordability of the plan.
Liquidity of the investment option
Unit Linked Insurance Plans offer individuals the option of partial withdrawal free of cost. This enables them to dip into the money they invested into the policy during a financial emergency such as a medical emergency, a child’s higher education requirement, etc.
Tax benefits
Under the Income Tax Act of India, 1961 ULIP investors are entitled to tax deductions on their investment. Additionally, they are allowed to claim tax benefits at different stages of their insurance policy.
For instance,
Entry level: Individuals are entitled to claim tax benefits of up to Rs. 1.5 lakh on their premium payment under Sec 80C.
Exclusive switching: Investors are allowed to make debt-equity switches in ULIPs that are tax-free.
Exit advantage: Individuals also avail of tax benefits on maturity under Sec 10(10D).
These features and benefits make ULIPs an ideal option for goal-based investment planning.
Tips to Maximize Returns from ULIPs
Here are a few tips that can help you make the most of ULIPs and increase your wealth:
Tip 1: Start early
Staring ULIPs early in life allows your investment to grow and generate better returns over time. Typically, the longer duration helps lower the risk associated with short-term volatility prevailing in the market. Besides the investment aspect, a ULIP also ensures you have a life cover from an early age.
Tip 2: Invest regularly
Investing in ULIPs on a regular basis can help inculcate financial discipline. This will benefit your financial planning and allow you to generate substantial returns over time through your investment endeavors. To ensure consistency you may enable an auto payment facility to ensure your ULIP remains active and generates returns without the manual need for you to pay consciously.
Tip 3: Take advantage of different funds
Individuals get the option to choose from multiple funds and invest in debt, equity, or hybrid funds as per their risk appetite. Individuals can use this feature to align their investment choices as per their risk appetite and goals and generate returns accordingly. Above all, investors have the option to switch between funds to adjust and realign their investment goals and cushion market risks and volatility.
Tip 4: Review your portfolio
It is crucial that you review your ULIP portfolio frequently and track investments to ascertain how the same is working out for you. Having an insight into the same will help you understand whether you should switch from debt to equity funds or vice versa in ULIPs are stick with the same in a given situation. Reviewing your portfolio also helps determine the right time to increase investment in ULIP for better returns.
Tip 5: Avail of tax benefits
Typically, the premium amount paid toward a Unit Linked Insurance Plan can be claimed for deduction under Section 80C, while the returns on investment are tax-free under Section 10 (10D). Individuals should make the most of these tax benefits and know about the claim process in detail to save money.
This is how individuals can make the most of ULIP plans and streamline their financial goals for better returns. However, they should also pay attention to the insurance provider and their quality of service to ensure a hassle-free investment experience.
