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IN THIS POLICY, THE INVESTMENT RISK IN INVESTMENT PORTFOLIO IS BORNE BY THE POLICY HOLDER

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$Tax benefits as per prevailing Section 10(10D) and Section 80C of the Income Tax Act shall apply. You are requested to consult your tax consultant and obtain independent advice for eligibility before claiming any benefit under the policy.

Bajaj Allianz Life Insurance Co. Ltd. | IRDAI Reg. No. 116.
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$Tax benefits as per prevailing Section 10(10D) and Section 80C of the Income Tax Act shall apply. You are requested to consult your tax consultant and obtain independent advice for eligibility before claiming any benefit under the policy.

Bajaj Allianz Life Insurance Co. Ltd. | IRDAI Reg. No. 116.

What Is ULIP? - Meaning, Full Form, And Benefits

 

What Is ULIP?

 

Unit Linked Insurance Plan or ULIP is a type of Life Insurance policy, which offers you dual benefits of insurance and investment. ULIP offers you an opportunity for wealth creation along with the protection of a life cover. In ULIPs, you invest your money in the financial instruments (equity, debt, or a combination of both). The returns on the investment depend upon the performance of the funds selected by you.

 

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 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?

 

Although an insurance offering, a ULIP plan also works as a goal-based investment opportunity that has been designed to help you meet your financial goals. Before you invest in one of these plans, you need to understand where your money will be invested.

As with any insurance policy, you will be required to pay a premium for your Unit Linked Insurance Plan. Your premiums paid will be invested in market-linked funds as opted by you. If you have a high risk appetite, you can choose to invest in equity funds. On the other hand, if you aren't willing to take too much of a risk, you can put your money in a debt fund. To enjoy the benefits of returns without high risks, people also prefer investing in a combination of both equity and debt funds. Since the investments are made to help you meet your financial goals, you can choose in what kind of market-linked funds your money should be invested in.

Insurance companies allow you to switch between funds from time to time as per the terms and conditions specified therein. There is no tax implication on the same and you can decide to switch based on the market movement and investment goals. For example, if a particular fund is underperforming, you may switch to the one that has delivered a better performance. You can also switch from one asset class to another based on your changing life goals. For instance, when you are young at the start of your career, and have lesser responsibilities you can opt for higher risks and invest in equity funds. However, as you move closer to your retirement age, you may opt for debt as they have a low risk.

 

Fund Options Under ULIPs

 

While understanding what a ULIP is, you may find different fund options offered, which you can choose based on your risk appetite and investment goals. Here are three broad categories you can choose from-

 

● Equity funds –

 

Equity funds are the funds directly invested in the equity markets. They may have a high-risk profile, along with the potential to offer high returns.

 

● Debt funds –

 

In debt funds, the money is invested in securities, such as corporate bonds, government securities, or other fixed income investments. These funds may usually offer lower returns than equity since the risk involved is also significantly low.

 

● Liquid Funds –

 

These funds are also known as cash funds or money-market funds as they invest in liquid assets such as money market instruments, short-term debt securities. These funds typically offer lower returns than equity and debt funds.

 

● Hybrid/Balanced funds –

 

Hybrid/balanced funds consist of a mixed asset allocation in debt and equity instruments. It is for investors who are looking to balance the risk-reward ratio of their ULIP portfolio.

 

Benefits of Investing in ULIPs

 

 

1. 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 financial product.

 

2. 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.

 

3. 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.

 

4. 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 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.

 

5. 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.

 

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:

 

1. 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.

 

2. 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.

 

3. 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 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 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

 

 

1. 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-

  • The purpose of your investment
  • Fund options
  • Terms and conditions of the plan
  • ULIP charges
  • Tax benefits
  • Features and benefits you can avail of the plan

 

2. 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.

 

3. 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.

 

4. 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

 

5. 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.

 

6. 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.

 

7. 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.

 

8. 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].

 

9. 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

References

1. https://www.bajajallianzlife.com/life-insurance-guide/life/what-is-the-free-look-period-in-life-insurance-policies.html

2. https://www.bajajallianzlife.com/life-insurance-guide/ulip/ulip-maturity-taxation.html

BJAZ-WEB-EC-02914/23

#Survey conducted by brand equity – Nielsen in March 2020

~Tax benefits as per prevailing Income tax laws shall apply. Please check with your tax consultant for eligibility.

**Past performance is not indicative of future performance.

The above information is for general understanding and is meant to educate the general public at large. The reader will have to verify the facts, law and content with the prevailing tax statutes and seek appropriate professional advice before acting on the basis of the above information.