What Is a ULIP Policy?
A Unit Linked Insurance Plan (ULIP) provides life insurance cover and also invests part of the premium to different funds. These funds can include equity, debt, or balanced funds. The value of these funds might change based on how the market performs. ULIP equity funds are an important ULIP fund because they mainly put money in equity shares of companies, which might grow over time. Knowing about ULIP equity funds and other funds can help you understand how ULIP policies work.
Types of ULIP Funds Every Investor Must Know
ULIP plans usually offer different types of funds. Each fund type may have a different level of risk and return. The main types are equity funds, debt funds, balanced or hybrid funds, and liquid funds.
Equity Funds
Equity funds mostly put money in equity shares of companies. These funds have probability of giving higher returns over a longer time but can go up and down in value a lot. They might be good for people who can wait for many years and accept some risk.
Key points about equity funds:
- Mainly hold company equity shares
- May give higher returns, but with more ups and downs
- Might suit long-term goals
- Value can change with the stock market volatility
Illustration:
If ₹10,000 is allocated to an equity fund, the value might grow to ₹15,000 over 5 years if markets do well. But if markets fall, the value might drop to ₹8,000. This shows the ups and downs of equity funds.
Debt Funds
Debt funds put money in government bonds and other debt instruments. Debt funds are less risky and can provide stable returns. They may be suitable for individuals seeking safer alternatives .
Features include:
- Put money in bonds and other debt instruments
- Generally less risky than equity funds
- Target stable returns
- May be suitable for medium-term
ULIP debt funds tend to concentrate on these fixed-income securities. They can be more stable than equity funds since their value does not fluctuate as much with market fluctuations. This could make ULIP debt funds an important option for those seeking lower risk.
Balanced or Hybrid Funds
ULIP balanced funds or hybrid funds mix both equity and debt funds. This mix may help balance risk and returns. Usually, they keep a fixed ratio of equity and debt . These funds might be good for people who want some growth but also stable returns to some extent .
Features include:
- A mix of shares and bonds
- Moderate risk and returns
- May reduce ups and downs by mixing funds
- Might suit medium-term goals
Illustration:
If ₹10,000 is split between equity and debt, the value might grow to around ₹13,000 over 5 years, with less risk than pure equity funds.
Liquid Funds
Liquid funds put money in very short-term and safe options like treasury bills or certificates. These funds aim to keep money safe and easy to get when needed. They might be used for short-term needs or emergencies.
Key points:
- Put money in short-term options with high liquidity
- Low risk and have easy access to money
- Usually lower returns than other funds
- May be suitable for short-term or emergency needs
Features of a ULIP Policy
ULIP policies combine life insurance cover with different fund options and tax benefits.
Comprehensive Protection
A ULIP policy provides life insurance cover along with the fund value. If something happens to the life assured , the nominee might get the higher of the sum assured or the fund value depending upon the terms and conditions of the policy. This may help provide financial security.
Features include:
- Life insurance cover included
- Death benefit to the nominee
- Protection combined with market linked fund value
Tax Exemptions
If you pay for a ULIP policy, the premiums may be eligible for tax deductions under Section 80C of the Income Tax Act 1961, in which case you can have deductions of up to ₹1.5 lakh in any given year (under old tax regime). If you follow the old tax regime, the funds you receive at the time of policy maturity or if someone dies, will fall under tax-exempt provisions under Section 10(10D) if some conditions are satisfied.
Under both the old and new tax regime, ULIPs where you pay aggregate annual premium of more than ₹2.5 lakh each year would be treated differently. In these cases, the money you get back when the policy matures would be taxed as capital gains. This means a tax of 12.5% if you held the policy for more than a year (since ULIPS have a lock in period of 5 years). However, the money given if someone passes away remains tax-free under Section 10(10D).
Tax benefits may include:
- Deduction on premiums paid (up to ₹1.5 lakh) under Section 80C (under old tax regime).
- Tax- exempt returns when the policy matures, if yearly premiums are ₹2.5 lakh or less subject to satisfaction of certain conditions.
Customizable
ULIPs may allow switching between different fund types depending on market conditions or personal preference. After the 5-year lock-in period, policyholders can make partial withdrawals from their ULIP investment.
Features include:
- Switching between equity, debt, balanced, and liquid funds.
- Changing future premium allocation to other funds, which is also known as premium redirection.
- Partial withdrawals after the lock-in period.
ULIP equity funds and other ULIP fund types may offer choices for different financial needs and risk levels. Knowing these important ULIP funds might help in understanding how ULIPs work. Equity funds may give more growth, but with more risk. Debt and balanced funds might give steadier returns with less risk. Liquid funds could be used for short-term needs with easy access and low risk. ULIPs combine life cover with fund options and tax benefits, making them flexible. It may help to check your risk comfort, goals, before choosing a ULIP fund. This may help in making clear and careful choices for your financial planning.
FAQs
What is the surrender charge in ULIP?
If the policy is surrendered during the lock-in period, the Regular Premium Fund Value, after deducting the applicable Discontinuance/Surrender Charge, along with any Top-up Premium Fund Value (if available) as on the surrender date, will be transferred to the Discontinued Life Policy Fund maintained by the insurance company. Upon surrender, all risk cover will terminate immediately. Please note, the Discontinuance/Surrender Charge applies only to the Regular Premium Fund Value. A policy surrendered during the lock-in period cannot be revived. The amount accumulated in the Discontinued Life Policy Fund, known as the Discontinuance Value, will be paid to you at the end of the lock-in period. If the policy is surrendered after the lock-in period, the Surrender Value, which includes the Regular Premium Fund Value and any Top-up Premium Fund Value as on the surrender date, will be paid out immediately. The policy will be considered terminated once the Surrender or Discontinuance Value is paid by the insurance company..
What are the 5 charges of ULIP?
ULIPs may have five main charges among others. First, it's worth noting that the premium allocation charge is deducted from the premium before it is allocated to the funds. Second, the fund management charge is an annual fee for the fund manager to manage your money. Third, the mortality charge is the life cover charge based on your age and the amount of cover you take. Fourth, the policy administration charge is for running the policy. Fifth, surrender or discontinuance charges may apply if you surrender or discontinue payment of premium early .
What are the hidden charges in ULIP?
Some charges in ULIPs may not be clear at first. These include switching charges if you change funds more than allowed for free. Premium redirection charges might be taken if you change where your future premiums go. Rider charges are additional costs for extra cover(s) such as illness cover,
Is ULIP good for 5 years?
ULIPs have a 5-year lock-in period, which means you can’t make any withdrawals prior to that. Ending the policy early may lead to applicable charges and the fund value will be transferred to discontinued fund. and less money back. Keeping the policy active for at least 5 years may help avoid these charges and may give tax benefits. ULIPs are usually for longer goals, and how much money you get on maturity depends on market changes and applicable charges. You may want to think about your needs and comfort with risk.
What are the benefits of ULIPs compared to other insurance options?
ULIPs give you life insurance and let you put money into different funds . This may help your money grow with the market while giving life cover. ULIPs may let you switch funds, take money out after 5 years, and give tax benefits. These features might suit people who want both protection and the chance for their money to grow in one plan.
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