ULIP (Unit Linked Insurance Plan) is a type of insurance policy that offers the policyholder to pays an annual or monthly premium.
ULIP is a combination of insurance as well as investment. A small amount of the premium goes to secure the life of the investor and the rest of the money is put into investments like stocks, bonds, or mutual funds.
With the investment in ULIP, policyholders could make their future portfolio or plan such as retirement planning, children’s education, daughter’s marriage, or another important event. With a life insurance ULIP, the beneficiary would receive payments following the owner’s death.
How does ULIPs work?
The policy also provides a death benefit to the policyholder and the amount of the policy will be paid to the mentioned nominee if the policyholder dies during the term of the ULIP.
Besides, if the policyholders live during the term of the ULIP, they can also get the maturity value of the ULIP.
Lock-in-Period of ULIP
One of the changes brought about by the Insurance Regulatory and Development Authority of India (IRDAI) in the year 2010 as regards ULIPs, was to increase the lock in a period from 3 years to 5 years.
However, insurance being a long-term product, an investor may not receive the benefits of the policy unless he/she holds it for the entire term of the policy which can range from 10 to 15 years.
Why Should an Investor Invest in the Unit Linked Insurance Plan?
2. Tax Benefits: In ULIP an investor is eligible for a claim tax deduction under Section 80C of the Income Tax Act, 1951. In also addition, the death and maturity benefit received from a ULIP is exempted under section 10 (10D) of the Income Tax Act, 1961.
3. Dual Benefit: ULIPs are the type of Life Insurance Plan that offers investment benefits while providing life cover throughout the policy period.
4. Addition of Loyalty: ULIP plans also offers a variety of loyalty bonus additions in investor’s investment. This adds to investor’s saving amount on maturity.
5. Life Cover: ULIPs provide a solution to both investment and life insurance cover. It offers security that a taxpayer’s family can fall back on in case of emergencies like the untimely death of the taxpayer, etc.
6. Finance Long Term Goals: If an investor has long-term goals like buying a house, a new car, marriage, child higher education, etc., then ULIP is a good investment option because the money gets compounded. As a result, the net returns are generally more.
Advantages of the ULIP policy
1. Market linked returns: ULIPs allow earning market-linked returns as part of the premiums are invested in market-linked funds that invest in different market instruments including debt instruments as well as equity.
2. Life protection: ULIPs offer the benefit of a Life Cover, which secures the policyholder’s family his/her absence.
3. The flexibility of Investment: Investors will have flexibility and control of their investment through the following ways:
a) Fund Switch: The option to switch among investment funds to match your changing needs.
b) Premium Redirection: An option to invest for future premiums in a different fund of investor’s choice.
c) Partial Withdrawal: An option allows to partially withdraw from fund, subject to charges and conditions.
d) Top-up: An ULIP plan offers to invest additional money with existing savings.
4. Tax benefits: Under the Income Tax Act, 1961, policyholders can save tax on hard-earned money by investing in a ULIP.
Types ULIP charges
A. Premium Allocation Charge
This charge is deducted as a fixed percentage of the premium paid in the early years of the policy.
This is usually charged at a higher rate. This charge is depending upon the size of the premium. The charges include the initial and renewal expenses and intermediary commission expenses.
B. Mortality Charges
Mortality charges depend on several factors like age, and the amount cover, etc., that is deducted every month. These charges are charged towards providing a death cover to the insured.
C. Fund Management Charges
These charges levied for the management of the funds and are deducted as a percentage of the fund’s value before the fund reaches its NAV. The maximum charge allowed is 1.35 % per annum of the fund value and is charged daily.
D. Partial Withdrawal Charge
ULIPs offer the option of partial withdrawals of funds. These withdrawals can be free for up to a certain limit or can be charged on investor’s transactions based.
E. Switch Charges
Investors can switch among the funds available to suit their needs and goals. There are options to switch funds for free up to a certain limit per year. Thereafter any further changes might incur a charge of Rs. 100 -Rs.250 per switch.
These charges are deducted by canceling units proportionately from each of the funds have chosen by the policyholder.
F. Administration Charges
A fee is charged for the administration of policyholder’s policy every month, which is deducted every month by the cancellation of units from all funds chosen by the policyholder. This charge can be levied at a fixed rate or as a percentage of premiums.