Insurance is indispensable, and some investments are necessary for future financial security. So how about you combine the two components into an easy-to-manage proposition? That is precisely what ULIP insurance brings to the table. Unit-Linked Insurance Plans, or ULIPs, are hybrid offerings that help customers invest for future goals while obtaining much-needed life coverage. Doesn’t this seem like an exciting option? This article teaches a little about the basics of ULIP investments for beginners.
How ULIPs Function
Once you understand what a ULIP plan is, you should also know some facts about how they work. These include the following:
- ULIPs come with 5-year lock-in periods. This means that you can only withdraw your investment without any charges after the expiry of this duration. You can always choose to continue or renew your investment for the long term.
- After deducting applicable charges, your premium is invested into market-linked instruments like equity, liquid, and debt funds or a combination of both
- You can choose the funds that you wish to invest in at the beginning
- Your investment will be eligible for tax deductions under Section 80C, up to Rs. 1.5 lakh
- The maturity benefits may also be tax-free under Section 10 (10D) in case your annual premium is less than Rs. 2.5 lakh
- Any payout resulting from a death claim is tax-exempted under Section 10 (10D), irrespective of the premium amount and other conditions
- Suppose the policyholder’s unfortunate demise happens within the policy tenure. In that case, the insurance provider will pay the fixed sum assured to their nominees or the fund value, whichever is higher for a Type-1 ULIP. Type-2 ULIPs, on the other hand, pay the sum assured to the policyholder’s nominees in any such scenario.
- You can switch funds within the policy period based on your changing needs and market conditions. For example, you can switch more of your portfolio towards equity funds in bull markets or push back towards higher debt funds in bearish markets. This feature helps you minimize your risks, safeguard your portfolio, and ultimately scale up your returns.
- ULIPs are professionally managed by experienced fund managers of insurance companies, and investors do not have to keep tracking their investments as a result
Now that you’re clear about the modus operandi of ULIP insurance, here are a few things you should note while investing.
Factors To Keep In Mind While Investing in ULIPs
Remembering a few basics is always recommended before you finalize your ULIP investment. These include the following:
- ULIP investments are ideally made with a longer horizon. The power of compounding helps along with riding out short-term market fluctuations. ULIPs generate the best returns if the investment period is over ten years.
- ULIPs should be tailored as per specific future goals that you have in mind, like the higher education of your children, retirement planning, buying a house, and so on
- ULIP investors should also have some level of familiarity with equity markets and other fund choices available while looking at benefiting from capital appreciation in the long term
- ULIPs have several accompanying charges, including mortality, fund management, premium allocation, and administration charges. Investors should check the same carefully before investing
- Look at the number of free fund switches offered by a ULIP scheme. Most companies restrict the fund-switching option in the policy. The best plans come with unlimited switches. Most companies allow 5-10 switches annually, with charges of Rs. 50-500 afterward.
The ULIP charges need to be understood carefully in order to understand how they impact your returns. Here is a guide to the same below.
Charges Payable for ULIP Investors
ULIP investors have to shell out many kinds of charges, which naturally affect the overall returns on their investments. These include the following:
- Premium Allocation Charges- These are charges for several duties of the insurance company, including medical check-ups, underwriting, and soon.
- Administration Charges- These are fees payable for the administration of the policy, and they may change on a monthly basis. It sometimes remains fixed throughout the policy tenure or changes at a pre-fixed rate.
- Fund Management Charges- The IRDAI has limited these charges to 1.5% per annum, and they are charged on the fund’s value. These charges pay for the fund management feature and are computed prior to NAV calculation. Hence, they do not impact the latter.
- Surrender or Discontinuance Charges- If there is any premature ULIP surrender within four years, then the discontinuance charge is imposed accordingly. Surrender charges are levied after the fifth year onwards.
- Partial Withdrawal Charges- Investors can withdraw prematurely from their ULIPs after three years in case of any emergency. Yet, early withdrawal comes with accompanying penalties as per the policy document.
- Mortality Charges- These are charges imposed by the insurance company to ensure death coverage for the insured individual.
- Switching Charges- Investors can change their funds if their premiums are invested two times each year minus any charges. After the free limit is exhausted, every fund switch will draw charges of Rs. 100-500 based on the terms and conditions of the insurer.
Considering all these factors is strongly advised while investing in ULIP insurance. If they are correctly managed, ULIPs can turn out to be rewarding long-term investments that comfortably outstrip inflation.
Santosh Kumar is a Professional SEO and Blogger, With the help of this blog he is trying to share top 10 lists, facts, entertainment news from India and all around the world.