ULIP stands for Unit Linked Insurance Plan and is a product that encompasses the benefits associated with a life insurance plan as well as an investment plan. In a ULIP plan, you make regular investments in the form of premiums, and a percentage of that amount goes towards providing you with a life cover; the rest of the amount works like a SIP or systematic investment plan where the amount gets invested in equity and debt funds to increase your financial health. If you are someone who wants the dual benefit of a life cover as well as an investment plan, ULIP is a great option.
What are the features and Benefits of a ULIP Plan?
- ULIP offers life cover + Market Linked Returns: ULIPS are a unique plan since they offer incredible financial security to your family by giving you both a life cover along with market-linked returns that add to your wealth over a period of time.
- ULIPs are EEE products: ULIPs are one of the best financial instruments to save on taxes as they are EEE instruments (EEE stands for Exempt-Exempt-Exempt) making you eligible for tax deductions under the IT Act, during both the initial investment as well as the earning stage. You also get exemptions during withdrawal. Every premium that you pay towards your ULIP plan, is eligible for exemptions as per IT laws.
- Flexibility to invest as per your risk appetite: ULIPS allow you to choose your funds based on how much risk you can take. You have the option to choose between various equity, debt, and balanced funds. Moreover, you can always switch from your chosen funds to another one to suit your financial needs.
- They are a great Long-term Investment Option: ULIPs are great for long-term investment, and ideally, you should stay invested for at least 15-20 years for maximum benefits. The longer you stay invested the better the returns since any market fluctuations and charges deducted are better compensated for over longer periods and your premiums can be diverted towards better-performing funds for maximum effect.
- Level Paying Premiums: All premiums, whether regular or limited-term come with a uniform payment structure. And any additional premiums you pay are used to provide life insurance cover.
- Charges are Evenly Distributed: As per IRDAI, any charges levied on a ULIP plan are distributed in an even manner over the 5- year lock-in period of the plan. It’s best to go through the details of your ULIP plan to get a better understanding of payable charges before investing.
How Does a ULIP Plan Work?
A ULIP fund works by demarcating an amount that goes towards providing you with a life insurance cover, and the rest of the amount is diverted towards wealth building by investing it across various financial instruments:
Equity Funds
Your ULIP plan will allocate some funds for investing in equity funds to stocks with NAV or Net Asset Value attached to them. In simple terms, a NAV is the price per share in a fund.
Debt Funds
Some amount of your investment in ULIP plans is invested in debt funds like government bonds, and debentures, etc. which are less risky compared to equity funds. However, they offer lower returns compared to equity funds but are considered to be a safer option.
Hybrid Funds
Hybrid plans are designed to offer you capital growth using elements of equity, along with the lower risk elements of a debt fund to help you balance out any losses due to market fluctuations.
If you are a working professional, self-employed, or business owner; the best ULIP plans can offer you both the flexibility of a life insurance cover along with market-linked returns making it a great investment option if you want to create long-term wealth. It’s a long-term financial plan that works in your best interest by ensuring maximum returns on your investment. Moreover, the flexibility to choose your own funds, and switch funds as per your requirements gives you the power to control your investments.
But, before you decide to invest, you need to understand what is ULIP carefully. To do so, here are some things you should keep in mind:
- Applicable charges including surrender charges (those payable on premature surrender of ULIP plan)
- Investment fund options are available
- Features and benefits
- Limitations and exclusions
- Consequences of ULIP plan lapsing
- Other disclosures
ULIP plans allow you to invest and grow your wealth by managing your hard-earned money for maximum gains. Make sure you find a plan that aligns well with your financial objectives.
Photo by Bonnie Kittle on Unsplash
