Popularly known as Unit Linked Insurance Plan, ULIP has been in the limelight for a long time. It offers the dual benefit of insurance as well as investment. In addition to that, it offers high returns on investment. ULIP is the best investment option, for the investors having a wide investment horizon.
7 Reasons You Should Invest in ULIPs
Out of many, here are 7 reasons why you should invest in ULIPs:
1. Dual I-I Benefit- With dual (I-I) benefit of investment and insurance, ULIPs offer life cover which provides insurance benefit to the family members of the insured during the policy tenure. In addition to that, it offers returns on investment at the time of policy maturity.
A pre-decided amount is allocated from the total premium towards investment in the preferred instrument (debt and equity) by the policyholder. This mix investment portfolio helps them to accomplish their financial goals in the long term.
2. Triple E-E-E Benefit– ULIP’s policyholder enjoys the triple EEE (Exempt-Exempt-Exempt) benefit. This indicates the eligibility of a policyholder for claiming tax rebate during the three stages i.e. investment, returns, and withdrawal.
They can claim tax deductions for the premium paid from their yearly taxable income. Unlike mutual funds, the best part is that ULIPs are free from any of tax burden. After the end of the lock-in period, the policyholder can withdraw their fund along with the accumulated returns. Hence, the maturity amount or sum assured is exempted from any kind of tax.
Apart from that maturity proceeds are also tax-free.
3. Top-Up Advantage– ULIP investment enables the policyholder to increase the investment amount. With the help of top-up facility, they can invest extra money in their existing policy. In case their existing fund has been performing well, they can easily invest in surplus money in the existing premium amount to participate in the fund’s growth.
4. Option to Switch- Switching option enables the policyholder to switch the ratio of exposure in equity, hybrid, or debt funds as per their risk profile and the performance of various funds. Besides, the amount allocated into equity and debt instruments varies depending on the investor’s risk appetite. ULIPs are perhaps the only financial tool that offers flexibility to its policyholders. This ‘switching’ facility allows the policyholders to move their investment amount totally or partially from one fund to the other without paying any charges.
The policyholders who actively follow trends of the capital market can easily exercise this unique feature from the comforts of their home. Additionally, they can visit the nearest branch of their ULIP provider. Majority of the ULIP Plans offer few free switches each year.
5. Structure of Charges– Majorly, ULIPs come with 5 different charges- policy administration charge, premium allocation charges, fund management charge, surrender charge, and mortality charge:
- The administration charge is charged for ULIP maintenance.
- During the initial period, the policyholder will have to pay higher premium allocation charge due to the underwriting cost fund management.
- Fund management charges usually fall in the range of 0.5%-2%.
- The surrender charge is applicable when the policyholder surrenders the policy before its maturity date.
- Mortality charge is a variable charge which involves the cost allocated for offering life cover to the insured.
During the initial years, the policyholder is charged higher charges. In the long run, the applicable charges will be less and the returns would be higher. Since ULIPs offer good returns in the long term; the policyholder need not bother with any of these five charges. As per the IRDAI regulations, the ULIP charges are capped at 3 percent. Hence, the policyholder will have to pay less and they can get higher returns.
6. Lock-in Duration– ULIPs usually come with a lock-in period of a minimum of three to five years. The policyholder may opt to discontinue the policy after the end of the lock-in period. In such a case, the accrued corpus is shifted to a discontinuance fund. It is mandatory for all insurance providers to offer returns to the insured. The main objective of discontinuance fund is to provide money from the lapsed plan. During the lock-in period, liquidity isn’t provided to the policyholder. After the end of the lock-in period, the insured can withdraw money as per their requirement. The money will be provided after subtracting the applicable discontinuance /surrender fees relevant to respective policy. After the end of the lock-in period, the insurance provider cannot levy any charge except the fund management fees.
7. Potentially Better than Others– ULIPs offer much better returns as compared to other insurance products. ULIPs invest the money in different asset classes. Though tax-saving funds offer considerably higher returns, the policyholder can opt for a different fund each year as per its performance. The amount offered on maturity depends on the equity market’s performance during the fund tenure. Endowment plans, on the other hand, pay a fixed amount after the end of a specific time period. Tax saving FD (fixed deposit) comes with a lock-in period of 5 years. Returns are further added to the investor’s income which becomes taxable as per the income tax slab.
The investors who were inclined towards FD investment are slowly diverting towards insurance and mutual funds. With a change in the pattern of investment and availability of market-linked tool such as ULIPs, a higher number of individuals are opting for ULIPs.
Over to you
As a rule, any earning individual must be insured for a minimum of 10 years’ income. Life cover offered by ULIPs is 10 times the annual premium. It makes the policyholder stay immune against market volatility. They offer liquidity, returns, safety, suitability, and transparency. It’s a wise decision to invest in ULIPs.
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