A Unit Linked Insurance Plan or ULIP is actually an insurance that extends the perks of investment and life insurance. Usually, when an individual pays a premium toward ULIP, a part of the premium goes towards their life insurance coverage, and the remainder amount is invested in different financial assets, including bonds, stocks, and money market instruments.
Individuals consider ULIPS a suitable instrument to achieve one’s long-term financial goals, which include saving for their child’s higher education and retirement. The insurance aspect of the plan extends peace of mind in knowing that the individual’s dependents will be financially protected in the event of the insured’s death.
Hence, ULIPs can be suitable for those looking for a means to invest their hard-earned money and avail of life insurance coverage at the same time. However, it is crucial to understand the types, key features, and risks associated with ULIPs before investing.
Types of ULIPS
ULIP can be categorized based on the exact type of mutual funds associated with them. For instance –
- Equity Funds: ULIPs essentially invest most of their resources in equity-oriented assets, like company stocks.
- Debt Funds: ULIPs invest their mutual funds in debt instruments, like bonds, money market instruments, and government securities.
- Balanced Funds: Balanced funds primarily invest a mix of the premium amount in debt and equity instruments.
- Whole Life ULIPS: Whole-life ULIPs or 4G ULIPs, are typically a new generation of traditional Unit Linked Insurance Plans that extend lower charges and features compared to the older version of the plan. Some of the key traits of the whole-life ULIPs include – the removal of return on mortality charges on the plan’s maturity and the removal of charges on the plan’s premium.
These traits make whole-life ULIPs a lucrative option for individuals who seek a long-term investment with life insurance plan coverage.
Key Traits of Parking Money in Unit-Linked Insurance Plans
Flexibility to select a life cover
ULIPs allow individuals the flexibility to select life cover that could help them meet their financial and security needs. Most ULIPs tend to extend a minimum life cover of 10x the annual ULIP premium, but individuals can also pick a cover of up to 40x their annual premium.
Flexibility to select the type of investment
ULIPs offer individuals the freedom to select the type of investment they would park money into and how the same would be invested. Individuals have the flexibility to choose from equity, debt, or balanced funds, depending on the individual’s risk-taking capacity and their investment goals. Individuals who wish to generate robust returns in the long term and possess a high-risk tolerance may pick equity funds-linked plans. Individuals who wish to generate steady returns may select debt mutual funds. Individuals can select an online SIP calculator to compare ULIP returns with other lucrative investment options, like SIP, and decide if the plans are suitable for them or not.
The option to switch between key options
ULIPs offer individuals the flexibility to select and switch between funds, on the basis of their changing risk-taking appetite and financial goals. However, many insurance companies allow them only a limited number of switches in a year for free and may levy a fee for more switches. This makes it crucial to check the fund switching options and ULIP charges before putting money into it.
Liquidity of the investment
Unit Linked Insurance Plans allow partial withdrawals without any penalty, providing individuals access to investment in case of any financial emergency such as meeting higher studies costs, medical bills, and others.
Tax benefits
The Income Tax Act of India, 1961 entitles ULIP investors to claim tax deductions on their annual investment. In addition, the act allows individuals to claim income tax benefits at various stages of their policy. For instance at –
Entry level: ULIP investors are entitled to claim robust tax benefits of a maximum of Rs. 1.5 lakh on their Unit Linked Insurance Plan premium payment under Section 80C.
Exclusive switching: The individuals are also allowed to make switches from debt to equity in Unit Linked Insurance Plans that are tax-free.
Exit advantage: Investors are allowed to claim tax benefits on ULIP maturity under Sec 10(10D).
These key features and notable benefits make ULIPs a lucrative option for maximizing the perks of goal-based investment planning.
Tips to Make The Most of Returns from ULIPs
These tips can enable individuals to maximize the benefits of the ULIPs and help them boost their scope of wealth generation –
Tip 1: Start early
Investing in Unit Linked Insurance Plans early in one’s life offers individuals’ money more time to accumulate and earn returns.
Tip 2: Invest regularly
Regular investments in Unit Linked Investment Plans can allow individuals to develop financial discipline and meet their financial goals by generating steady returns.
Tip 3: Make the most of different funds
Individuals can also select funds from a variety of options, including equity, debt, and hybrid funds, based on their risk-taking capacity. This notable feature enables individuals to align their investment goals with their risk-taking capacity and financial objectives and to earn returns accordingly.
Tip 4: Review the portfolio
Individuals should also review their ULIP portfolio and track their investments to determine how the plan is working to help them meet their goals. This practice helps understand which type of fund is working the best and which is not lucrative for their goals.
Tip 5: Avail of tax deductions
Unit Linked Insurance Plans extend tax benefits to individuals under two major sections of the Income Tax Act, 1961 – Section 80C and Section 10(10D). ULIP holders can claim a tax deduction of a maximum of Rs. 1.5 lakh on the amount of premium paid towards the plan under Section 80C. In addition, the maturity proceeds on ULIP do not attract any tax under Section 10(10D). However, the same is subject to specific conditions.
Keeping these tips in mind, individuals can make the most of ULIP as a financial tool and plan their finances accordingly. However, it is also encouraged to compare plans and their offerings to make an informed decision.
