Deep dive into Unit Linked Insurance Plans or ULIPs
Introduction
In today’s fast-paced world, financial planning is paramount. An individual is expected to know about investment and insurance. These financial products serve different purposes- Investing is related to wealth creation, whereas Insurance is financial protection. An individual must strike a balance between the two to have sound financial planning. Unit-linked insurance plans are a widely acclaimed investment cum insurance instrument globally. Unit-linked insurance plans, or ULIPs, as they are generally called, are integrated financial products that have features of both insurance and investment.
What is ULIP?
ULIP stands for Unit Linked Insurance Plan. This is an insurance product that offers investors exposure to capital markets. You can gain market-linked returns by investing in equity/ debt/ hybrid funds. With ULIPs, you can create wealth to achieve your life goals while the smiles of your loved ones stay protected.
How does ULIP Work?
Working on a Unit-Linked Insurance Plan is pretty simple. The insurer invests a part of the premium you have paid in shares or bonds, and the rest is invested in providing life cover. Once you pay the premium, several more investors invest in the same portfolio. The insurer further pools this money and, after deducting the expenses, invests in the fund chosen by you. It could be either equity, balanced or debt funds. The total sum of money is further divided into units. The insurance company allocates these units to each investor according to the amount invested. This unit value is called NAV or Net Asset Value. The units’ NAV either increase or decrease based on the market value. On maturity of the plan, the insurer pays the fund value to the investors depending upon the market value. In case of your untimely death, the insurer pays your beneficiary higher than the fund value or available fund value. ULIPs also allow you to switch between equities and debt and vice-versa if you wish to do so. If equity markets are not doing well, you can switch to debt to preserve your gains. On the other hand, you can move from debt to equity if you have a high-risk tolerance. This flexibility has made ULIP policies highly popular.
These instruments also have a five year lock-in period where the investor cannot withdraw their units. If you start prematurely, the death cover is ceased immediately, and you are paid the balance amount only after three years.
Types of ULIPs
ULIPs for long-term wealth creation:
Regular and Single Premium ULIP: In a standard premium ULIP, you need to pay dividends over some time. On the other hand, in a single premium ULIP, you pay the entire premium. You can choose the one as per your income and cash flow. Life staged based and Non-life stage based ULIP: Needs at different stages of life are different, isn’t it? Life stage based ULIPs invest your money accordingly. For example, when you are young and single, you may have a higher risk appetite, and, therefore, a higher allocation is towards equities. As you grow old, the equity allocation reduces. The strategy ensures asset allocation matches your age and financial requirements. However, this is not the case with a non-life stage-based plan. You choose the funds as per your risk appetite and can switch between them when desired. Guaranteed and Non-Guaranteed ULIP: Capital protection is the objective of guaranteed ULIP. It has limited equity exposure. On the other hand, a non-guaranteed ULIP offers you a range of funds as per your risk tolerance and financial goals. In these ULIPs, you can opt for a high equity
ULIPs to secure your child’s future (Goal Based):
As a parent, you want to give the best of everything to your child. It’s your responsibility to secure your child’s future and ensure their needs are met even in your absence. ULIPs for a child can help you in your efforts and ensures your child’s needs are well-taken care of even when you are no longer around. These ULIPs help you save and build a large corpus for your child’s higher education, and in case of an unfortunate event, the insurer pays a fixed lump sum that helps your family meet immediate requirements. Also, some plans offer the facility to partially withdraw to fund essential education milestones of your child’s life.
ULIPs for retirement:
Everyone dreams of a stress-free retirement. ULIPs for retirement help you save and invest in a disciplined manner to build a large retirement corpus that enables you to take care of your post-retirement needs with ease. While the purpose of the ULIP mentioned above plans may differ, they help you in disciplined savings and investments to achieve your set goal.
Why buy ULIPs?
Flexible: ULIPs offer investors the option of switching between funds, resulting in better choices for the investor. Investors can choose to invest in either debt or equity funds depending on their risk appetite and market conditions. Risk appetite: ULIPs offer investors to choose their investments based on their risk appetite. Low-risk appetite investors can choose to invest in debt funds, and those willing to take a higher risk can opt for equity funds. Low charges: ULIPs do not have high costs associated with them. IRDA has capped the annual fee on ULIPs at 2-2.25% p.a. for the initial ten years, with the charges on par with mutual funds. Long term investment: ULIPs are a long term investment option due to the increased lock-in period, which also reap more significant returns. Disciplined Investing: ULIP plans function with periodic regular investments in the form of premiums. This discipline of traditional investment takes you closer to the mission of wealth creation and achieving the financial goals at the right time.
Tax Benefits
Premium paid on ULIPs is eligible for a deduction under Section 80C up to a maximum of ₹ 1.5 lakhs during a year. Further, the amount you receive on maturity is tax-exempt under Section 10(10D).
FAQs
When were ULIPs introduced in India?
ULIPs were first introduced in India by the Unit Trust of India (UTI) in 1971. Life Insurance Corporation of India (LIC), then, introduced more ULIP products in 1989.
Which organisations issue ULIP?
Generally, public and private sector insurance providers, which either operate solo or have partnered with foreign insurance companies, offer ULIP products to their customers. Offering ULIP products requires the approval of both the Reserve Bank of India (RBI) and the Insurance Regulatory and Development Authority of India (IRDAI).
Can I switch my investment fund choice after availing of ULIP?
Yes, Investors can freely switch between funds as per their wish and convenience. However, a certain switching charge is applicable and levied by insurance companies.