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© 2021 KlarifyLife. All rights reserved.
Disclaimer:
In this policy, the investment risk in the investment portfolio is borne by the policyholder. The Linked Insurance products do not offer any liquidity during the first five years of the contract. The policyholders will not be able to surrender/withdraw the monies invested in Linked Insurance Products completely or partially till the end of fifth year.
A unit linked insurance plan (ULIP) is a type of life insurance policy that offers life insurance coverage and investment in a single plan. These are an interesting choice for those who look forward to securing the financial future of their family and having an opportunity to grow their money from a single plan.
Demystifying ULIPs: Breaking Down the Basics
A ULIP is essentially made up of two components. The life cover component and the investment component. The aim of the life cover component is to help secure your family’s financial future. Your family gets the life cover of the plan when you pass away during the policy period. This life cover payout can help them overcome financial difficulties that may arise when you pass away (such as loan repayment or maintaining their current lifestyle).
The investment component of ULIP targets growing your money by investing it into financial markets (such as stocks) and helping you achieve your long-term goals (such as your child’s marriage).
How ULIPs Work: A Step-by-Step Guide
When you pay a premium towards your ULIP, a part of it goes for your life cover, and the other part gets invested into the financial markets. What’s interesting about ULIPs is that you can choose which fund to invest in from a range of options, based on your goals and risk-taking ability. You’re assigned investment units that are in proportion to your invested money.
You pay your premiums according to your chosen premium payment term (such as single pay, limited pay, etc.). Upon maturity, you’ll get the maturity returns. Maturity returns will depend on the market performance. Additionally, it’s crucial to understand that ULIPs have certain costs attached to them, and this can impact your returns.
If you want to make withdrawals from your ULIP earlier than its maturity, you can do so; however, doing this may impact your maturity returns. Further, you cannot withdraw before the lock-in period in ULIP, which is 5 years.
Benefits of Investing in ULIPs: A Dual Advantage for Wealth and Protection
There are a host of ULIP benefits for their policyholders. Here are the details:
1. Protection for your family: The life cover component helps in securing your family’s financial future. The payout, which is made when you pass away during the policy period, can help them overcome financial difficulties that may arise when you pass away.
2. Flexibility: One of the key advantages of a ULIP investment is the freedom to tailor your portfolio according to your goals and risk appetite. You can begin by selecting from a wide range of fund options and later switch between them if your financial circumstances change. Beyond that, you can further enhance the coverage of your ULIP by adding riders, ensuring that your investment offers comprehensive coverage and financial security for your loved ones.
3. Tax benefits: You can get deductions up to Rs. 1.5 lakhs on premiums paid towards ULIPs under Section 80C of the Income Tax Act, 1961. Additionally, if you have a health-based rider, such as the critical illness rider, added to your ULIP, you can get deductions on the premiums paid for such riders. An interesting thing to note is that the life cover payout made to your family is tax exempt under Section 10(10D) of the Income Tax Act, 1961.
4. Regular savings: ULIPs encourage you to make savings a habit for your financial goals. When you save money, you can use it to invest for your long-term financial goals (such as building your dream house). Since ULIPs make you pay for premiums, you may get into a savings mindset as you’ll need to save some money for your ULIPs.
Who Should Invest in ULIPs: Is It the Right Choice for You?
ULIPs are not suitable for every investor. You should invest in ULIPs if you:
1. Want a single plan that helps you protect your family financially and offers you the option to grow your money. ULIPs offer a life cover for your family’s financial protection and an investment component that can help you grow your money.
2. Understand the risks associated with investing in the financial markets, and if you are okay with them, the returns on your investmentthat you will be getting will depend on the performance of the financial markets.
3. Are planning to achieve long-term goals, and you are looking for investment returns over the long term. A point to be noted is that ULIPs have a mandatory lock-in period of 5 years.
ULIPs may not be the right fit for you if you are looking for short-term gains.
Tips to Choose the Right ULIP
With so many ULIP options available, it’s easy to feel overwhelmed. Here are a few tips to help you select the best ULIP plans that align with your financial goals:
1. Know your financial goals – Whether you’re planning to buy your dream home or fund your child’s wedding, begin by understanding how a ULIP can help you achieve these aspirations. Having this clarity ensures that you select the most suitable investment fund from the diverse range of options that ULIPs offer.
2. Protect Your Family Adequately – Determine the appropriate life cover amount to ensure your family is well protected in your absence. Providing sufficient coverage helps them handle potential financial challenges and maintain their lifestyle.
3. Know your risk appetite – Consider your age, salary, and financial commitments so that you don’t end up taking on risk that you cannot handle.
4. Compare charges across ULIPs, as they can impact your maturity returns. Try to choose the ULIP that has the lowest charges.
5. Study the different fund options offered by your ULIP, such as equity, balanced, etc. Pick the one that suits your risk appetite.
6. Check for flexibility when it comes to opting for riders and the number of free fund switches (if offered).
You can also get in touch with a financial advisor to help you select the right ULIP for yourself.
Ways to Boost Returns with ULIPs
ULIPs invest your money in the financial markets, which means that your returns are dependent on the market performance. While predicting your exact returns can be tough, owing to the nature of the financial markets, taking a few steps can help you maximise the chances of getting good returns from your investment. Here are those steps:
1. Start early and stay invested for a long time, as this can help you beat market volatility. Staying invested for a short period of time may not yield the results that you were expecting.
2. Carefully select the fund option that aligns with your financial goals. For example, if you are looking for the best ULIP plan with high returns and you’re okay with handling high risk, an equity fund may be the right option for you. If you’re looking for liquidity, then liquid funds may be the right option for you.
3. Keep investing consistently, as this can create a large investment corpus over time. Setting up autopay for your ULIP premium payments can help you in this activity.
4. Review your portfolio regularly and study its performance. This can help you switch funds if necessary to better meet your goals or seize on some market opportunities.
5. Consider the different tax benefits your ULIP offers; claiming those benefits can ultimately help you increase your returns.
Why Buy a ULIP?
Unit linked insurance plans offer a great way to protect your family financially and invest your money to meet your long-term financial goals. However, they are not for everyone, and only those people who understand their workings, risks, and benefits should invest in such plans.
Tax Disclaimer: Tax benefits & exemptions are subject to conditions of the Income Tax Act, 1961 and its provisions and tax Laws are subject to change from time to time. You are requested to seek tax advice from Chartered Accountant or personal tax advisor with respect to personal tax liabilities under the Income-Tax law
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