Unit Linked Insurance Plans (ULIPs) are a unique life insurance product, as they provide the dual benefit of a life cover as well as wealth creation through strategic investment in market-linked funds.
On the surface, ULIPs function almost like any other insurance plan. You have to pay your premiums periodically, as per a predefined schedule. After this, a difference emerges. The insurer invests a portion of your premium in providing you with life cover. The insurer invests the remaining amount in the market to avail high returns. Your insurer lets you choose the amount you want as life cover. This ensures a secure financial future for your family in the instance of your untimely death during the tenure of the policy. It also lets you benefit from the progress of the market.
Your approach to risks
An essential element of investment in the market is the ability to take risks. In a general scenario, the younger you are, the higher the risk you can take. You have to consider your risk-aversion or appetite and choose the plan that fits your personality. Your life goal is another factor that should influence a choice here. Typically, ULIPs offer a variety of funds you can choose from, which are made up of either equity, debt, or a balance of both.
Tips for choosing the best ULIP policy
Here are some helpful tips for choosing the best ULIP coverage that fulfills your requirements:
- Consider the features
Since a ULIP combines investment and life cover, you should look for the following features:
- Fund-switch – The ability to switch your money among equity, balanced and mutual funds.
- Partial withdrawals – The facility to withdraw part of your money if required. Note that regardless of the insurance provider, there is a lock-in period of 5 years during which you cannot make any withdrawals.
- Premium-redirection – The ability to transfer your fund from the base option to the fund you choose.
- The facility to top-up- This feature lets you invest some extra money in your policy over the amount of the premium once or multiple times, as you prefer. This way, you can take advantage of your well-performing policy.
- Consider the duration of your investment.
ULIP is a long-term investment product. It features a lock-in period of a minimum of five years. Thus, the duration of your investment is one of the first concerns you should address. If you prefer short-term investments, ULIPs may not be a suitable investment for you. The longer your investment remains in the market, the higher your returns will be due to the principle of compounding. If you are unsure, you can use a ULIP return calculator to get a rough idea.
- Consider the life cover available.
ULIP is an insurance plan first, with the added benefit of wealth creation. Thus you have to ensure that you are getting financial protection for your family and loved ones. Analysts say it should be more than ten times your yearly premium. Whatever is the amount, it should be sufficient to ensure your family and enable the life you want them to enjoy.
- Know the tax benefits you can avail
Your ULIP investment is tax-exempt at every phase. The premiums you pay, up to 1.5 lacs, are tax-exempt as per section 80C of the Income Tax Act, 1961. The sum assured is also tax-exempt as per section 10(10D). See to it that you fulfill the following requirements to avail the tax benefit available for you here:
- Your investment for the year should not exceed 10% of your life insurance premium.
- See to it that your premium does not exceed INR1500000.
Evaluate the modes allowed for premium-payment
Today, you are free to customize everything as per your requirements. This applies even to ULIPs. See to it that the T&C of the ULIP you take matches your preferences. You should be allowed to withdraw money from your investment as and when required. This facility usually starts from the time the lock-in period ends.
When it comes to paying a premium, you may receive three options; single, limited, and regular. You pay the entire premium as a lump-sum amount in the first instance. Limited-term mode of payment lets you pay for a fixed number of years during the tenure. If you decide to pay regularly, you will pay as per the schedule chosen until your policy expires.
Analyze your budget and choose a mode of payment accordingly.
- Do comparison shopping
The market offers an astounding number of options when it comes to ULIP plans. When shopping for one, compare the plans offered by various insurance companies for the features you are looking for and opt for the one that will give you the maximum value for money. You should also consider your risk appetite when choosing a fund to invest in.
- Evaluate your goals
Your investment goal should determine the fund you choose to invest in. For a youngster saving for retirement, an equity fund is worth trying. The risk is a bit on the higher side, but so are the gains. The abundance of time at hand mitigates the risk and guarantees maximum returns on your investment.
If you are a financially healthy person, ULIP is an added advantage to your financial portfolio. But see to it that you choose the right one to get the most from it.
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