What is a Unit Linked Insurance Plan?
Unit-linked Insurance Plan, better known as ULIP is a mix of insurance along with investment. It is a type of life insurance plan that provides benefits of protection against risks and flexibility to manage your investments. The goal is to provide wealth creation along with life cover where the insurance company puts a portion of your investment towards life insurance and rest in a fund that is based on equity or debt and matches your long-term goals which could be retirement planning, children’s education or another important event. A ULIP is also considered as an investment product that provides for insurance pay out benefits. The unit linked Insurance Plan requires a premium payment which is invested in investment products for capital appreciation. Part of the premium paid by the investor also goes towards providing the insurance cover and the balance is invested in types of instruments desired by the policy-holder. These plans are most suitable for getting insurance and also growing your money. ULIP offerings are primarily concentrated in India.
A unit linked insurance plan’s investment options are structured similarly to a mutual fund. The assets in a ULIP plan are managed to a specific objective. The plan calculates a net asset value and is then market-linked and appreciates with increasing share value. When an investor purchases units in a ULIP, he or she is purchasing units along with a larger number of investors, just like an investor would purchase units in a mutual fund. Investors can buy shares in a single strategy or diversify their investments across multiple market-linked Unit-linked Insurance Plan funds.
How does a Unit Linked Insurance Plan work?
A ULIP is typically started by an investor seeking to provide coverage for beneficiaries. It is paid into by the owner in the form of premiums, with the intention of the plan’s worth to be paid out at a specified time frame and for a specific purpose. Unit Linked Insurance Plans require a premium. The premium which you pay for your Unit-Linked insurance Plan is used for building wealth and provides insurance coverage as well. In the starting years of the plan, a large amount of the premium is used for the plan expenses. Later on, the premium is divided into two different segments- investment and insurance. Units are issued for the amount invested in a fund of your choice; it can be debt, equity or a combination of both. The allocation of the units relies on the performance of the original fund. In the initial years, because of the deduction of high expenses, the value of the fund would stay low.
Premiums vary with the terms of each Unit-linked Insurance Plan. An initial lump sum is typically required along with annual, semi-annual or monthly premium payments. Unit-linked insurance plans allow for the coverage of an insurance policy with premium payments allocated to funds that are expected to increase at market rates over time. Premium payments are proportionally invested towards specified coverage and in the designated investments. ULIPs work best when invested for a longer period of time with multiple investment options. The funds can be chosen by the customers depending on their risk appetite or in other terms the ability to handle the loss. The right balance of investment in equity and debt funds over a longer period of time can protect the customer from the ups and downs of the market. The Insurance Regulatory and Development Authority of India (IRDAI) changed the lock-in period for ULIP’s from 3 years to 5 years in the year 2010. However ULIPs being a long-term product, as an investor you may not really reap the benefit of the policy unless you hold it for a longer term which may range from 10 to 15 years.
ULIP’s allow you to switch your portfolio between debt and equity based on your risk appetite as well as your knowledge of the market’s performance. Unit-linked insurance plan investors can make changes to their fund preferences throughout the duration of their investment. The funds offer to transfer flexibility. Numerous investment options are also available including stock funds, bond funds and diversified funds.
Why are Unit Linked Insurance Plans good?
- Life cover: with ULIPs you get a life cover coupled with investment. It offers security that an investor’s family can depend on this plan in case of events like the untimely death of the investor, etc. It is a type of plan that protects and offers you great returns as well.
- Tax benefits: the premium paid towards a Unit-linked Insurance Plan is eligible for a tax deduction under Section 80C in India. Even short-term gains made by the policyholder by switching from one plan to another are tax-free. In addition to this, the returns out of the policy on maturity are also exempt from income tax under Section 10(10D) of the Income-tax Act. This is a dual benefit that you can claim with this type of plan.
- Choice of Systematic Investment: apart from the insurance coverage, it is a good tool for systematic investment planning as it allows you to choose your investment and get good benefits in return depending on current market scenarios.
- Long Term finance Goals: If you have long-term goals like buying a house, a new car, etc., then ULIPs are a good investment option because the money gets compounded. As a result, the net returns are generally more than what you would receive in a traditional insurance plan. This holds true even if you want to exit after the initial lock-in period in comparison to not having invested the amount at all and retaining it in a savings account.
- The switch flexibility: ULIPS are usually designed in a way that they allow you to switch your portfolio between debt and equity based on your risk bearing ability as well as your knowledge of how the market may be performing. ULIPs do not force you into investing as they provide freedom to choose your investment options as per your own risk profile.
- Market Linked Return: ULIPs allow an individual to earn market-linked returns as part of the premium is invested in market-linked funds that are invested in different forms of investment tools.
Difference between Unit Linked Insurance Plan’s and Mutual Funds
Unit-linked Insurance Plans are often confused with another financial product- mutual funds. While ULIPs are investments with the dual purpose of providing an insurance cover as well as earning a return by investing, Mutual funds are investment vehicles that first accumulate money from investors and then investing in different assets to earn a return. The biggest difference between the two is that mutual funds do not offer a life cover as unit-linked insurance plans do.
Watch for these differences before you invest in ULIPs or Mutual Funds
|SCOPE||Only investment purpose||Investment and Insurance cover|
|TAX DEDUCTION||Only equity-linked saving schemes will give you tax deductions||According to the section 80c of the income tax act, money invested is deductible from your taxable income.|
|LIQUIDITY||Funds can be withdrawn within a year but 1% of the fund value is deducted.||Limited liquidity due to an initial lock-in period of 5 plus years.|
|FUND MANAGEMENT CHARGES||Fund management charges are high.||Fund management charges are low.|
Making the Most of Your Unit Linked Insurance Plan
- Foresee the long term: The most important thing about ULIP is that they are long term investments. You stand to gain the most if you stay invested till maturity. They are not short term investment vehicles to earn quick gains.
- Be clear of the Objective: the prime objective should be to have adequate life insurance cover to protect yourself from unforeseen events. Work out the required life cover on the basis of your age, income, and dependents.
- Customize your plan as per your requirement: You can use the various add-on benefits to customize a plan.
- Riders: A rider with a ULIP is an additional cover along with the base policy available for an extra charge. This could be accidental death or disability benefit, or a critical illness cover.
- Top-ups: For an additional amount over your regular premium, you could increase your investment component on the base policy. In these cases, partial withdrawals are permitted generally after five years.
- Switches: You could switch your investments from one fund to another in case of changes in the risk profile for a nominal charge.
India has come a long way from manually exchanging bonds under a tree, today we have several options of financial products that will help an individual invest his earnings depending on his needs, limitations, risk appetite and financial goals. Shriram life growth plus ULIP does exactly that.
It is the best plan in India that offers multiple choices in terms of flexibility of investments and premium adjustments. With the lowest investable premium starting at only ₹ 4000/-* month. It also has attractive loyalty additions upon maturity. Whether it be safeguarding your wealth or creating more you cannot make the wrong choice with this.