ULIP (Unit-Linked Insurance Plan) is a triple-advantage financial product. The product offers insurance, capital appreciation and income tax benefits. Unlike tax-saving equity-linked mutual funds, ULIPs are free from Long Term Capital Gains. There are various kinds of ULIPs which can be bought to fulfill your life goals in a very efficient way. You can go through the products offered by various insurance companies to understand the features and you can pick the most appropriate plan as per your needs. If you are focusing on short-term gains, you can consider debt-based ULIP funds.
Unit-linked insurance plan
As you choose the ulip investment, it is possible to cover the investment as well as insurance with a single product. The greatest advantage of the ulip fund is that you can reap the returns from the capital market. If you are a novice investor, there will be a great risk in investing in the stock market. With the help of a professional and competent financial expert, the job is made easy.
Before buying a unit-linked plan, you should assess your life goals. The product that matches your life goals can be selected very easily. Unit-linked plans are provided to fulfill the needs of customers. The minimum lock-in period for unit-linked plans is 5 years. There are plans to fulfill the educational expenses of your choice and your retirement needs. You can also buy health insurance plans which are linked with market returns.
Income tax advantage
Unit-linked plans offer income tax advantage. The investment-cum-insurance product offers income tax benefits as well. You will get an exemption on the insurance premium up to Rs. 1.5 lakh per annum under Section 80C. The maturity proceeds are tax-free in the hands of the policyholder. If the policyholder dies, the death benefit will be awarded and the proceeds are tax-free in the hands of the beneficiary.
In order to make short-term capital gains from ULIPs, you should invest in safe and sound securities, bonds and government instruments. The short-term gains are gains made in less than one year.
Benefits of ULIPs
The following benefits are available with ULIPs:
- Flexibility – You can switch over from one fund to another fund very easily with the help of ULIP. It is possible to make a better choice with ULIP. You can choose either debt-based funds or equity-based funds as per your risk appetite and financials. For short term capital gains, you should go for debt funds as there will not be a risk to the capital.
- Low risk– if your risk perception is very low, you can choose debt funds. On the other hand, equity funds are suitable for high-risk investors. Besides capital appreciation, you will get insurance and income tax benefits.
- Lower expenses– ULIPs are offered to customers at an affordable price. The expenses are very little. As per the IRDAI norms, the insurance companies should ensure that the expenses should not cross 2% to 2.5% per annum. You can also explore new age ULIPs where the expenses are closer to zero percentile.
- Fulfills lifegoals–ULIPs can be chosen as per your needs so that your financial goals will be fulfilled in a very efficient manner. You can choose children’s education policy wherein the educational expenses of your child are met in your absence. Similarly, you can choose retirement plans and health insurance plans to fulfill your long-term goals.
- Long-term capital appreciation– The capital appreciation will take place by investing in ULIPs for at least 10 years. Hence, most of the ULIPs are available with a 5-year lock-in period. However, you can switch over from one fund to another fund as per your risk appetite.
- Income tax benefits– The premium paid towards the insurance policy is exempted from the income tax under Section 80C of the income tax act. The returns from the insurance policy are exempted from the income tax.
- Customization of policy– ULIPs can be customized as per your needs. You can choose the insurance premium, premium payment term, policy term and sum assured as per your convenience. As you increase the insurance premium, the ‘sum assured’ will also increase proportionately.
- Riders – you can get additional benefits by choosing various kinds of riders. By paying a little extra premium, you can enjoy great benefits. In addition to enhanced protection, you will enjoy added benefits by subscribing to various kinds of riders. The riders which are relevant to your needs can be subscribed and irrelevant riders can be unsubscribed.
- Protects life– You will invest short-term funds to achieve capital appreciation and it is also possible to get insurance cover in a very efficient manner. If the unfortunate event takes place, the beneficiary will get the financial benefit. There are plans to offer the death benefit as a lump sum as well as in installments.
- Loyalty additions – By being associated with the insurance company, your relationship will give you additional benefits in the form of loyalty additions. Additional units will be added by the insurance company as a token of appreciation.
Types of ULIPs
There are different kinds of ULIPs which can be subscribed as per your needs. The funds can be categorized as per the risk. There are low risk, medium risk and high-risk investment options which can be selected as per your risk appetite and future financial goals.
- Cash funds – cash funds are also called as money market funds. They are easily accessible and you can invest in these funds very safely. As the risk is low, the fund returns also will be low. You can consider cash funds for short term capital gains.
- Income funds – income funds are also called as fixed funds or bond funds. The funds are invested in corporate bonds, government securities and debt funds. The investment will be made in secured as well as non-secured financial products. The risk factor with income funds is higher than the risk associated with the cash funds. Hence, investors can draw moderate returns.
- Balanced funds – The investment will be made in equity and fixed interest funds. The purpose of the fund is to ensure the safety of the capital. The equity portion will enhance capital appreciation. By investing in fixed bonds and securities, there will be guaranteed returns. Hence, balanced funds can be categorized as medium-risk funds.
- Equity funds–the risk with equity funds is very high. They are meant to deliver huge capital appreciation by staying invested in over a long period of time. Hence, equity funds are not suitable to fulfill your short-term capital appreciation. If the fund suffers loss, it will take many years to recover and reap great benefits.
Selection of ULIPs
The selection of ULIPs should be done as per your budget and future financial goals. There are many ULIPs offered by various insurance companies. The ULIPs can be customized as per your needs. You can choose the insurance premium payment term, the policy term and the sum assured.
There are ULIPs which allow the policyholder to increase the contribution or decrease the contribution in the form of premium. If there is a hike in salary, you can step-up the investment. On the other hand, you can cut down the premium due to a change in job or jobless condition.
- Financial goals – The financial goals vary from one person to another person. They change from one family to another family. Hence, you should assess your future financial requirements and should implement the best financial strategy to overcome various kinds of financial goals. Some of the common goals of investors are children’s education, children’s marriage, house construction and retirement. You might want to venture into your own business as well. Hence, you should choose the best ULIP that can fit into your goals.
- Compare products–You should go through the available ULIPs in the market. You should be aware of the premium, returns and expenses incurred in managing the insurance product. The expenses incurred in maintaining the ULIP is lower than the mutual fund. If you buy an online policy, you can further narrow down the options and it is possible to buy a plan with almost zero expense on your fund. The product comparison will help in choosing the best ULIP plan from the products offered by various insurance companies.
- Flexibility – You should choose the ULIP as per your convenience in terms of premium payment term and the policy term. As per the duration of the insurance policy, you can choose short-term ULIPs or medium-term ULIPs or long-term ULIPs.
- Selection of funds – ULIPs are based on various kinds of funds. There will be flexibility to choose funds as per your financial goals. The investment will be done across various funds. If you choose high-risk funds, there will be higher returns. On the other hand, you can choose low to moderate-risk funds so that the capital will be protected and you can obtain moderate returns.
- ULIP plan calculator – To calculate the returns of the ULIP, you can use the ULIP Plan calculator provided by the insurance company. You can find the calculator on the official website of the insurance company. There are various kinds of charges levied by the insurance company to manage funds. You can switch from one type of fund to another type of fund very easily.
Types of funds based on financial goals
There are funds based on targeted-financial goals.
- Child education - Child education policies are offered by various insurance companies in India. You can subscribe to these policies either online or offline as per your convenience. By buying an online policy, you can cut down the brokerage charges paid to the agent. Thus, you can buy an insurance policy at a competitive price. If your children go through the unforeseen circumstances, the insurance policy will cover their expenses involved in their education.
- Retirement planning - Buying a ULIP for retirement benefit is the best option. You can choose a plan that spreads from 10-year to 30-years. The capital appreciation will be very high when you choose ULIP on a long-term basis. After the end of the term, you can buy an annuity from the same insurance company or a different insurance company as per your convenience. The maturity amount is tax-free in the hands of the investor.
- Wealth creation - You can choose ULIP for the creation of wealth. The SIP mode of investment will help you accumulate small amounts at regular intervals. The compounding formula will multiply your investment many times and it possible to reap a huge financial benefit.
- Health plan - There are ULIPs which serve your healthcare requirements in the best possible way. The unplanned medical emergencies can be covered by a comprehensive insurance policy. By applying various riders, the critical illness or terminal disease will also be covered.
Insurance plans with higher death benefits
There are two types ULIPs based on the death benefits
- Sum assured or fund value – There are ULIP investment plans which offer either the ‘sum assured’ or the ‘fund value’ to the nominee.
- Both – Some ULIPs offer both the sum assured as well as the fund value (as per the NAV). Hence, you can choose the best plan as per your needs.
Fund management expenses
Before buying ULIPs, you should be aware of various kinds of expenses involved in maintaining ulip policy. The following charges are prominent:
- Policy administrative charges
- Premium allocation charges
- Surrender charges
- Mortality charges
- Discontinuation charges
- Fund management charges
- Fund switching charges
Most of the insurance companies offer free fund switching option. You will derive maximum benefits with the fund switching option and there will be a complete control on the investment.
To minimize the risk and to achieve moderate returns, customers can go for debt funds. There are balanced funds which can club the benefits of the equity investment as well as the debt fund investment and there is no risk to the capital. By subscribing to an equity-based ULIP, you can achieve your long-term financial needs. With an investment horizon of 5+ years, ULIPs offer attractive financial benefits. You can take advantage of the insurance coverage and income tax benefits as well.
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