How To Invest In ULIP Plans In 2023?

Over the years, unit linked insurance plans (ULIPs) have evolved for Indian investors¹. After numerous changes and multiple upgrades, today’s New Age ULIPs are one of a kind wealth generation tool available in India.

Whether it’s building your start-up, buying a house, going for a foreign holiday or saving for retirement, ULIPs allow you to customize your investment plan according to your life goals, investment horizon and risk appetite. Along with the investment benefit, ULIPs also offer a life cover, wherein if the life assured passes away during the policy tenure, the sum assured is paid out to the nominee(s) listed under the plan.

Another unique benefit of ULIP investment is that investors have the choice to select ULIP funds on their own. Using techniques such as fund switching and premium redirection, they can effectively optimize ULIP returns and reach their life goals with ease.

In this article, you will get some tips on how to invest money in ULIPs to get optimum returns and learn about important details such as:

How is the premium invested in multiple funds?

How NAV is calculated and fund value is generated?

Tax benefits of ULIP investment.

You can always leave the fund switching work to the ULIP’s fund manager, in case you are not comfortable with it. You can also consult a subject matter expert who can help you with the same.

Where Does My ULIP Premium Go?

When you invest in a ULIP plan, the premiums you pay are invested in variety of funds opted by you as available within the respective product after relevant deductions have been made. These ULIP plans also provide you with a Life Cover. Let’s understand this with an example.

Assume that you are paying a monthly ULIP premium of Rs. 100. Out of this Rs. 100, Rs. 5 is deducted as ULIP charges and Rs. 35 is invested for insurance cover. The remaining Rs. 60 (Rs. 100 – (5 + 35) = Rs. 60) is invested on various funds as selected by the investor. When this amount is pooled together from all other investors, it is called a Unit Fund.

Typically, insurance companies provide investors with the option to choose from funds available with the product or from investment strategies wherein few strategies allow investors to manage his/her own funds or let the insurer manages funds as per the needs of the investor.

What Is NAV and How Is It Calculated?

The Net Asset Value or NAV of a fund is the price per unit of a fund. ULIP NAV of a fund is dependent on the performance of the debt and equity markets. ULIP returns or fund value is calculated on the basis of NAV of the ULIP fund

NAV of a ULIP plan is calculated by deducting total debt of the fund from total assets and dividing it by the number of outstanding units.

The formula is: Net Asset Value (NAV) = (Assets – Liabilities) / (Number of Outstanding units)

Let’s illustrate this with an example.

Assume that the total value of assets for a ABC fund is Rs 50 Crores and is divided into 2 Crore units/ shares so that retail investors can invest in the fund. There are various operational costs of ABC funds such as administration charges, fund allocation charges, management fees, insurance claims etc. These are the liabilities of the fund. Assume this liability or costs amount to Rs. 2 crores per annum. In this case, NAV of the ULIP fund will be calculated as follows.

NAV of ABC ULIP plan = (Rs. 50 – 2 Crores) / Rs. 2 Crores = Rs. 48 crore/ 2 crores = Rs. 24

In this case, the NAV of ABC ULIP fund is Rs. 24 as on date of calculation

How To Choose The ULIP Plan?

Here are some tips for choosing the suitable ULIP plan –

• Assess your risk appetite so that you can pick the suitable investment funds from equity, debt or balanced funds.
• If you have a specific financial goal in mind, choose a relevant ULIP. For instance, a child ULIP is suitable for planning a corpus for your child’s future. On the other hand, if you want to create a retirement fund, pension ULIPs can be a suitable choice. For any other goals, you can go with the basic ULIPs that help in corpus creation.
• Choose a tenure that aligns with your financial goals so that the ULIP gives the funds when you need them the most.
• Choose a premium that is affordable so that you can continue the plan without any hassles. Also, choose a suitable premium payment frequency and tenure.

How Is ULIP Fund Value Calculated?

Before we explain how fund value is calculated, it’s important to understand that the value of a ULIP fund fluctuates with time depending on prevailing market conditions. It’s important to understand how fund value is calculated when you invest in ULIPs since total fund value is what you receive on the maturity of the ULIP plan.

Fund value of a ULIP can be easily calculated by multiplying the NAV on the particular day by the number of units in your account. For example, if you hold 1,000 units of a particular fund and the prevailing NAV on that day is Rs. 18, the fund value of your ULIP plan is Rs. 18,000 (1000 x 18). As the NAV fluctuates, so does the fund value.

Tax Benefits of ULIP Investment

Apart from being one of the preferred investment instruments to generate wealth and help in achieving your life goals, they offer a very effective method to save taxes. Some of these benefits include:

Section 80C deductions:(H3) Premiums paid are eligible for tax deductions up to Rs. 1.5 lakh per annum under Section 80C of the Income Tax Act 1961, subject to provisions stated therein.

Tax exemption on maturity benefit:(H3) ULIP tax benefits are offered on maturity too. The maturity amount plus any bonus amount is tax free according to section 10 (10D) of the Income Tax Act 1961. Here too the conditions are similar to those for availing tax deductions u/s 80C. For ULIP plans purchased after April 1, 2012, the annual premium should be less than or equal to 10 per cent of the sum assured for the entire term. For ULIP plans purchased before April 1, 2012, the annual premium should be less than or equal to 20 per cent of the sum assured for the entire term. In case there is a payout due to demise of the life insured during the policy period, the death benefit is tax free too.

Capital gains tax

Union Budget 2018 introduced the Long Term Capital Gains (LTCG) tax under which LTCG of over Rs 1 lakh in equity investments and equity mutual funds will be taxable at 10 per cent, without indexation benefits. ULIP plans allow you to invest in equity funds, but do not attract LTCG tax. ULIPs are convenient, transparent, value-packed and reliable investment products to help you achieve your life goals. If you dream of your own start-up in the future or a world tour to fascinating destinations or want to live a comfortable retirement life, ULIPs can be customized according to your life goals, investment horizon and risk appetite. Take a step towards your life goals today. Income from ULIP policies which are issued prior to 1 Feb 2021 and satisfying Section 10(10D) criteria is exempt in the hands of recipient. If the ULIP policy/policies are issued on or after 1 Feb 2021 with annual premium upto Rs. 2.50 lakhs and satisfies condition as mentioned under Section 10(10D), income from such ULIP policies is also exempt in the hands of recipient. If ULIP policy/policies are issued on or after 1 Feb 2021 with annual aggregate premium of Rs. 2.50 lakhs or more, gain from such ULIP policy will be treated as Capital Gain in the hands of recipient.

Conclusion

If you are looking for market-linked returns along with life cover to create an optimal corpus for your financial goals, ULIPs may be preferred . Understand what the plan is all about, its features and benefits, and then choose a suitable plan. Invest in the suitable ULIP and manage your investment with the flexibility of fund switching and premium redirection so that your investment aligns with the changing market dynamics and you may earn market-linked returns.

Also, understand the tax implication of ULIPs so that you can plan your taxes and create a tax-efficient corpus.

FAQs

1. Is it good to invest in ULIP?

ULIPs give market-linked returns, associated with market risks and volatility, that may help your corpus grow. You get liquidity through partial withdrawals and can change the investment funds through switching and premium redirection, subject to policy terms & conditions. The insurance coverage provides financial security, while the tax benefit reduces your tax liability. So, with ULIPs, you can manage your investments and create a suitable corpus for your financial goals. As such, it is preferred to invest in ULIPs.

2. When should we invest in ULIP?

It is better to invest in ULIPs at a younger age. Here are some reasons why –

• When you are young, you might have a high-risk appetite. As such, you may invest in equity funds and get the benefit of higher market-linked returns with high risk involved.
• If you give your ULIPs time, the investment risks may smoothen out and may provide potentially expected returns, but subject to market performance, among several other factors.
• You also get insurance protection from an early age.

3. How much should I invest in ULIP?

Choose a suitable premium when investing in ULIPs. The premium should be affordable so that you can continue the payments over the chosen tenure to enjoy the full benefits of the plan and also create a good corpus.

Reference:

1. https://www.bajajfinservmarkets.in/insurance/ulip/evolution-of-ulips.html

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