Getting Started with Unit Linked Insurance Plan
It doesn't matter if your age is 20, 35 or 50. Whatever your age, you are sure to have certain life goals and dreams that you hope to fulfil. You may want to start your own business, or perhaps you want to make a down payment on your dream home. Whatever be the reason, to be able to fund your life goals you need corpus. You can use an insurance cum investment plan such as a Unit Linked Insurance Plan, or ULIP, to help you save up the money required.
Unit Linked Insurance Plans offer a combination of life insurance and investment opportunities. ULIPs are generally considered to be one of the most sought-after insurance offerings.
How Does ULIP Work?
- Making Payment: To initiate a ULIP, you will be required to make premium payment on a regular basis, or as a lump sum.
- Allocation of Investments: Your premiums will be allocated to market-linked funds according to your risk appetite. You can choose equity, debt, or balanced funds.
- Fund Returns: The return you earn on your ULIP is dependent on the performance of the underlying funds. Funds such as equity funds may provide better returns but carry high risk. .
- Ability to Switch Funds: ULIPs allow you to switch funds according to market conditions. If a fund is underperforming, the underlying investment can be moved to other funds .
- Life Insurance Cover: With ULIPs, you will have built in life insurance cover which provides peace of mind knowing your loved ones will have financial security in the event of your passing.
- Partial Withdrawals: Some ULIP funds will allow for partial withdrawals after the lock-in period. This provides flexibility in emergencies.
- Maturity Benefit: If the life assured survives the policy term, they will receive the sum assured, and / or any fund value in line with the terms of the policy .
- Tax Benefits: ULIP also has tax benefits where the premiums paid are deductible under Section 80C (under old tax regime) and maturity proceeds under Section 10(10D) of Income tax Act 1961 subject to conditions stated therein.
This makes ULIPs a combination of insurance and investment, suitable for both wealth creation and risk management. They allow you to tailor your investment strategy based on your financial goals and market conditions.
Fund Options Under ULIPs
ULIPs offer a range of fund options like equity, debt, liquid, and hybrid funds, allowing customization based on your risk appetite.
Equity Funds
Equity funds invest in the stock market. They are ideal for individuals who have a high-risk appetite and seek high returns over the long term.
Debt Funds
Debt funds invest in fixed-income instruments like bonds. These funds are less risky and are preferred by individuals seeking stable but lower returns.
Liquid Funds
Liquid funds invest in short-term instruments, offering liquidity with relatively lower returns. They are suitable for those looking to park their money for a short period with low risk.
Hybrid/Balanced Funds
Hybrid funds are a mix of equity and debt, balancing the risk-reward ratio. These funds are perfect for those who want moderate returns with reduced risk.
Benefits of Investing in ULIPs
Benefits of investing in ULIPs include dual protection, flexibility, and tax-saving opportunities.
Dual Benefit of Investment and Insurance
ULIPs not only provides you a life insurance cover but provides an opportunity of wealth creation as well. With ULIPs you can earn market linked returns. Because of this dual benefit, ULIPs act as a comprehensive insurance cum wealth creation product.
You Can Choose Your Investment Option
Based on your risk appetite, you can invest your money in-
- High risk takers can invest in equity funds
- Moderate risk takers can invest as balanced approach
- Low risk takers can invest in debt funds
An investor can switch his funds based on the market outlook.
You Can Achieve Life Goals
ULIPs are a preferred option for long term investment such as buying a new house, children’s higher education, retirement planning and so on. ULIPs can act as a tool to create wealth for the future.
ULIPs Offer Tax Benefits
Premiums paid towards a ULIP policy is eligible for a tax deduction under section 80C of Income Tax Act, 1961, maximum up to Rs 1, 50,000, subject to provisions stated therein. This benefit is available only if old Tax Regime is opted.
Note that for ULIP policies issued on or after 1st February, 2021 with aggregate annualised premium more than Rs. 2.5 lakh will not be exempt under Section 10(10D) of Income Tax Act and any gain from such high value ULIP will be taxed as a capital gain under Income Tax Act 1961.
ULIPs Offer Flexibility in Investments
ULIP plans are a flexible investment option. It offers flexibility to-
- Switch between investment funds based on market outlook
- Make partial withdrawals
- Do a top up to invest additional sum of money
- Do a premium redirection as per the change of financial goals
These benefits can be opted for, subject to policy terms & conditions.
The Role of ULIP Plan
A ULIP is a life insurance plan which offers lifer cover with a component of market linked investment . You don't just get life cover, but at the same time, your money has potential to grow . Let's consider what makes a ULIP unique:
Flexible Investments
With ULIPs, you get to choose where your money is to be invested. You can opt for equity funds for greater risk and reward, or debt funds for less risk. You can even move between funds whenever you wish. This helps you stay on track with your goals.
Tax Benefits
ULIPs give you a chance to save on taxes. Under Section 80C, the money you put into ULIPs can be deducted from your taxable income. You can get up to ₹1.5 lakh deduction on your taxable income under old tax regime. Also, the money you get when the ULIP matures is tax-free under Section 10(10D), subject to provision stated therein.
Profitability
Your ULIP’s returns will be based on where you invest. Equity funds have the potential to provide you with high returns, but they can also be quite risky. Debt funds are safer, but they have comparatively less risk. You can, however, boost the likelihood of profiting by selecting the right mix.
Lock-In Period
ULIPs are locked in for five years. This is to say: You cannot withdraw your money before five years. This allows your money to grow more by compounding over time, which is rewarding in the long run.
Features of ULIP Plans
Flexibility
ULIPs are flexible in several respects. You can direct your investments, increase your premiums, and even transfer between funds if your goals change, which means they can be customized to your needs.
Dual Benefits
What makes ULIP a suitable life insurance plan is that you receive both insurance and market linked investment in it. And while you are getting the life cover, your investment accumulates over time, helping you to build wealth.
Financial Security
ULIPs offer financial security for your loved ones. If anything happens to you, your nominee gets the insurance coverage which can be higher of the sum assured or the fund value . At the same time, you get to save for future goals like child education or retirement.
Who Should Invest in ULIP Policy?
People with Varying Risk Appetite
ULIPs offer different fund options as per the risk appetite of the individual. There is a choice of market-linked funds for all types of individuals- from high risk takers to risk-averse individuals that can help achieve their life goals.
People who Want to Closely Monitor their Investments
A Unit Linked Insurance Plan allows you to closely monitor your investment portfolio. ULIPs also allow you to switch your funds to re-adjust the capital allocation with varying risk profiles
People with Medium to Long Term Investment Horizon
ULIP is a preferred investment option for you if you are ready to stay invested for a relatively longer period.
Investors across all Stages of Life
There are different types of ULIPs, available in the market today. An investor can select one, as per the suitability. Thus, investors can buy ULIPs in any stage of life and manage their investments with changing life stages and risk taking capacity.
Are ULIPs Good for Me?
Before you decide whether or not you want to invest in this insurance product, there are a few things you need to think about:
Why Are You Investing?
ULIPs have been designed to help you meet your financial goals. So, before you invest in a goal-oriented plan, make sure you outline your financial goals and identify the plan that will help you achieve your life goals.
What Kind of Charges Do I Need to Pay?
There are charges that come with investing in a plan like ULIP. Before you decide to put your money into a ULIP, make sure you educate yourself on the kind of charges that each insurance provider levies on their ULIPs.
How Do I Decide My Insurance Cover?
It's important to remember that along with investment opportunities, ULIPs also offer life cover. They are first and foremost insurance products, so you need to choose adequate life cover for yourself to safeguard your loved one's financial future. If you opt for the maximum sum assured offered by an insurer as per the terms & conditions of the plan, your family will be provided with adequate financial backing in the event when something unfortunate happens to you.
How to Choose a ULIP for Yourself?
The meaning of ULIP and its benefits may encourage you to buy one for yourself. Here are some pointers that may help you narrow your choices-
- Evaluate your life goals
- Choose enough life cover
- Choose an suitable tenure to enhance returns
- Select market-linked funds based on your risk appetite
- Avail tax benefits on the premiums you pay
How to Manage ULIP Funds?
Effective management of ULIP funds is imperative for achieving any financial goals. It really amounts to control over the investment of your money into the different funds and making changes as required. ULIPs provide various options for managing your funds.. You may switch the funds yourself, let the fund manager handle asset allocation through auto-switch options, or choose to invest more from time to time based on your financial goals. Any of these would help you respond to market fluctuations and cater to your financial needs. A proper understanding and active management of your ULIP funds increases the likelihood of your goal accomplishment, be it for an event in the future or wealth creation over a period of time.
Self-Switching
Self-switching allows you to manually change where your money is invested within your ULIP. If you think one of your funds is underperforming, you can move the underlying amount to another fund. This option gives you the flexibility to adjust based on market conditions or your changing financial goals. The process is simple and puts you in control.
Automatic Switching
Automatic switching is a feature in ULIPs that allows your investment to be reallocated between equity, debt, and other fund options based on predefined rules, without any manual intervention. This strategy is designed to optimize returns or manage risk according to your risk profile, age, or market conditions. This feature helps investors maintain a balanced portfolio and benefit from market opportunities without actively monitoring or managing the fund.
Investment Top-Ups
Top-ups constitute an easy way of adding some extra money to your ULIP. Under a ULIP with top-ups, you can invest an extra sum over and above your regular premium subject to terms and conditions of the plan. This raises your investment, and so you can accelerate your compounding effect on the corpus that way. Top-ups into a ULIP can create faster wealth creation and enable you to attain your long-term financial goals.
How to Increase Probability of Enhancing Potential Returns from ULIP?
You may consider implementing some of the below listed steps, among others, to increase the probability of enhancing the potential returns of your ULIP:
Start investing early –
The early you begin your investment journey, the more you may benefit from the power of compounding, wherein you earn returns on already existing returns on your investment.
Invest consistently –
Investing regularly may help you reap rewards over the long haul.
Switch funds when needed –
ULIPs have the options of fund switching and premium redirection, where you can change your fund allocation.
Monitor your portfolio –
Keeping a track of your market, allows you as an investor to make changes as and when required. You may switch your funds or continue with your existing funds based on their performance and market fluctuations.
Myths about ULIP Plans
Since ULIPs are new-age plans, there are several myths associated with them. Here are some of the common ones busted-
ULIPs have high risk –
While ULIPs are market-linked funds, you can choose the funds you want to invest your money in. If you are a risk-averse individual, you can opt for debt or hybrid funds with moderate to low risk.
ULIPs are rigid investments –
When you purchase a ULIP, you have the flexibility of choosing your premiums, funds of choice, and the duration of the plan. Along with it, you can use premium redirection and fund-switching options, subject to policy terms & conditions, to change your fund allocation as and when required.
ULIP Calculator & How to Use It?
You may have a certain goal in mind when you are investing in ULIP. For example, you want Rs. 10,00,000 when your ULIP matures for your child’s education. How will you determine for how long and how much you need to invest to achieve this goal? This is where a ULIP Calculator is helpful.
You can access a ULIP calculator online and enter the following details –
- The amount you need to achieve your goal
- Duration of your investment
- Choice of funds (whether risk-free or market-linked)
- Assumed returns on your investment
After providing the above details, the calculator will provide you with an estimated amount that you need to invest annually to achieve your goal. If the amount is difficult for you to pay in one go annually, you can choose monthly or quarterly premium payments as well.
How to Claim Tax Benefit on ULIPs?3
One of the advantages of buying a ULIP is the tax benefits you get under the Income Tax Act, 1961. You are eligible for tax deductions under Section 80C for the premiums paid against ULIP. This reduces your taxable income up to ₹1.5 lakh each financial year under old regime. It is essentially a tax-saving proposition by which you can secure the financial future of your family through life insurance and also invest in market-linked investments for wealth creation.
Usually, your ULIP maturity proceeds, including the sum assured, will be subject to tax exemptions under Section 10(10D) provided the annual premium is not greater than 10% of the amount assured. This reduces the tax burden on the benefits from the policy and maximizes returns in that it allows the benefits to grow without being taxed at maturity.
Also, ULIPs issued on or after 1st February 2021 become taxable under capital gains tax with respect to the returns earned if the aggregate annual premium exceeds ₹2.5 lakh. Thus, the amount has to be kept under the above limit for tax-free benefits. For Example, if you are planning to opt for ULIPs, check whether you fall under this category according to the premium amount and read the terms and conditions carefully.
How are ULIPs structured?
When you are understanding what ULIP is, it is vital to understand the structure of the plan. There are two components of ULIP - life insurance and investment. When you purchase one, you have to input details like the tenure of the plan, premium amount, and the funds you want to put your money in.
The funds offer returns based on their performance since they are market-linked. The principal amount along with the returns you earn is known as the fund value of your ULIP. The fund value of your plan is likely to increase over the years with the power of compounding.
On maturity, you will receive the fund value as of the date of maturity. The fund value may help you achieve your planned life goals. However, in an unfortunate scenario where you lose your life within the duration of your plan, your nominee will receive the death benefit.
Conclusion
The meaning of ULIP is simple, as it offers you, life insurance and investment opportunities in a single plan. It can be a potentially preferred investment if you invest regularly and in a disciplined manner. It has unique features like premium redirection and fund switching that allow you to optimize returns on your investment. You can achieve your life goals by investing in funds of your choice based on your risk appetite. Along with the plethora of investment benefits, it also offers you a life insurance plan to protect your loved ones financially in your absence.
Frequently Asked Questions on ULIPs
What are the things to keep in mind while investing in ULIP?
Here are few things you need to keep in mind when you invest in ULIPs
How much of the premium paid is used to purchase units?
The entire amount of your ULIP is not used for purchasing units. There are deductions in the form of fees and other charges applied. The exact portion of the premium utilised to purchase units vary depending on the life insurance company you choose.
Can I seek a refund of premiums if I am not satisfied with the ULIP policy, after purchasing it?
You can seek a refund on the premiums you have paid in the free-look period. The free-look period is the first 15 days of your policy (in case of an offline purchase) or the first 30 days (if you bought the plan online).[1] If you are unhappy with your current investment, instead of cancelling it, you may change your allocation by choosing fund switching and premium redirection options.
What is NAV in ULIP?
The NAV of your ULIP in simple terms is the total assets of the fund deducting any liabilities associated with the same. It is calculated by using the following formula – NAV of ULIP = [(The total value of your ULIP fund) - (Any liabilities like charges)] / Total number of units
When should I invest in ULIP?
Once you understand what ULIP is, the quicker you make an informed investment, the more will be the time you give your investments to grow. With the power of compounding, along with the principal amount, you may also get to earn interest on the previous returns.
How to enhance your returns from ULIP?
You can enhance your ULIP returns by investing in a disciplined manner and monitoring your funds regularly. As ULIP returns are market-linked, you can use the premium redirection and fund-switching features to sail through the market volatility, basis your risk appetite.
What is a ULIP lock-in period?
Lock-in period in a ULIP is tenure of five years, during which you cannot withdraw any funds from the plan.
Is there tax applicable to a ULIP?
The premiums that you pay on your ULIP are subjected to deductions as per Section 80C of the Income Tax Act, 1961[2]. When it comes to maturity amount, the taxability depends on when the plan was purchased. If you have bought a ULIP before February 1, 2021, according to Section 10(10D) the maturity amount is tax-free. However, this is only applicable where the annual premium is less than 10% of the death sum assured of the plans that are purchased after April 1, 2012. For plans purchased before it, the annual premium must be less than 20%[2]. According to the Union Budget of 2021, for ULIPs issued on or after February 1, 2021, any proceeds received from a ULIP where the annual aggregate premium from all ULIP policies exceeds Rs 2.50 lakhs will be treated as capital gains[2]. The death benefits that the nominee receives will be exempt from taxes as per the provisions of Section 10 (10)D of the Income Tax Act, 1961[2].
How to calculate ULIP NAV?
The Net Asset Value (NAV) of your ULIP is calculated using the following formula- [(The total value of your ULIP fund) - (Any liabilities like charges)] / Total number of units
How units are allotted under a ULIP plan?
Units are allocated in accordance with the amount of premium paid and the NAV (Net Asset Value) of the fund at that time. Your premium is divided by the NAV at the time of your investment to determine the number of units you receive. The number of units may go up or down based on how the fund performs in the market.
Can we increase the premiums for a ULIP plan?
Yes, you have the option to top-up your ULIP plan in order to raise your premiums subject to terms and conditions of the plan. In that way, you get to increase your investment, and this, in turn, assists in building the fund value.
Can I cancel/surrender my ULIP plan?
You have the option to cancel or surrender your ULIP at any time during the policy term. If you surrender during the 5-year lock-in period, applicable discontinuance charges will be deducted, and the remaining amount will be transferred to a Discontinued Policy Fund. This amount earns a minimum interest (as per IRDAI norms) and is paid out only after the lock-in period ends. If you surrender the policy after the lock-in period, you will receive the prevailing fund value on the date of surrender.
How long should I stay invested in a ULIP policy?
While a shorter duration might meet immediate needs, a ULIP's complete potential is generally realized through patience. Over the long haul, markets' fluctuations tend to average out. Sticking with your selection across changing markets increases probablity of maximizing the profits ultimately and make the most of your funds' potential.
References
- https://www.bajajallianzlife.com/life-insurance-guide/life/what-is-the-free-look-period-in-life-insurance-policies.html
- https://www.bajajallianzlife.com/life-insurance-guide/ulip/ulip-maturity-taxation.html
- https://cleartax.in/s/unit-linked-insurance-plan-taxation-rules
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