ULIP is the abbreviated form of Unit Linked Insurance Plan. It is an exclusive financial investment tool that allows for the dual benefits of investment and life insurance protection coverage. This is an umbrella product combining the advantages of both investment and insurance.
What is meant by ULIP?
To understand the ULIP meaning in full, you must note that this is the only financial investment option that allows dual benefits of market-linked investments and insurance protection coverage.
It is a unique combination of both market-linked investment benefits and insurance coverage under the scope of a single plan. Life insurance offers a significant benefit over conventional wealth building financial instruments.
It not only allows your investments to grow, based on the current market conditions, but even takes care to protect your beloved family members during challenging circumstances.
How does ULIP work?
ULIP’s investment component allows the investor’s funds to be invested in several asset classes and their preferred funds, like debt, equity, and balanced funds.
If you outlive the ULIP tenure, you will receive the maturity amount and utilise the funds to reach and fulfil several financial targets.
Moreover, the life insurance coverage component of a standard ULIP plan allows a death benefit during challenging circumstances in the event of any mishap of the concerned policyholder-cum-insured individual.
Under such circumstances, the designated beneficiary or the nominee receives the entire sum assured amount even if the total value of the investment of the concerned plan is comparatively lower.
Advantages of ULIPs
By now, it is well understood what ULIP is and how it works. But before investing, you must understand the highlighted benefits of ULIPs.
1.Investment flexibility:
You can enjoy flexibility in investing your funds in the following ways:
- Fund switch: You receive an option to move the funds between debt, equity and balanced funds based on your choice and requirements.
- Redirecting premium: You get the opportunity to invest the future premium in another fund of your preference.
- Partial withdrawal: This allows you to withdraw your funds up to a certain extent as per the chosen plan terms.
- Top-up: This option allows you to invest additional and excess funds into your existing savings.
2. Tax benefits:
ULIPs allow tax benefits. The premiums paid towards ULIPs are eligible for tax deduction up to INT 1.5 lakhs annually u/s 80c of the IT Act of 1961. The maturity proceeds of ULIPs are also tax-free as per Section 10 (10d) of the IT Act.
In case the concerned policyholder passes away during the plan tenure, the designated beneficiary will receive the sum assured amount as the death benefit. This is also tax-free as per the regulation mentioned u/s 10 (10D) of the IT Act.
Fund switching under ULIP also remains tax-free.
3. Regular savings:
ULIPs ensure the healthy habit of regular savings at regular intervals, which helps you cover extensive grounds in wealth building and fulfilling long-term financial goals. With uninterrupted premium payments, you can easily enjoy the advantages of wealth creation for your dependents.
4. Growth potential:
Because of the dual power of both debt and equity funds, the potential for comparatively higher returns is much higher. This aids you in fulfilling long-term targets like buying a new home, a luxury car, funding your children’s higher education, and your children’s marriages, etc.
5. Protection:
One of the major benefits of ULIPs is that they offer dual protection of both investment and insurance. The insurance protection cover allows your family to enjoy a reliable protective shield during rainy days.
6. Greater rewards:
Once you invest in a ULIP fund, your money grows not only because of the market performance, but the insurer also adds to your existing savings through several additions and bonuses in multiple forms, like loyalty programs, discounts in premiums, etc.
Choosing the best ULIP
Selecting the correct ULIP fund requires critical market research and expertise. As a first-timer, you must follow these few simple yet very tactful steps to fulfil your dreams and ensure optimum wealth building:
1. Personal goals:
In the case of these sorts of investments, there is no one formula that fits all strategy. Every individual is different, and so are their targets. Therefore, you must be critical about your necessities and targets. This is your primary step for planning.
ULIPs are invested in multiple fund variants like debts, equities, and balanced hybrid funds. Equity offers high returns but involves greater risk. This is ideal for long-term target achievement. Debt funds offer lower returns, but are comparatively much more stable, with lower risk involvement. This is suitable for short-term goals. Balanced funds strike a reliable balance between these funds, thus allowing moderate returns and risks.
Consider your circumstances, risk appetite, tenure, preferences, etc., before finalising your choice. You can also seek professional guidance as a first-timer.
2. Compare:
The market offers an array of ULIP products, each capable of fulfilling various targets and suitable for individuals with varying risk appetites. The cost for ULIP fund management also varies. So, you must compare several competent funds before finalising to grab the best deal.
3. Flexibility:
This allows you to choose your fund from various options. This not only includes fund choices, but also allows you to select your preferred premium payment frequency. You must check if your fund allows easy fund switches, top-up contributions, and partial withdrawals to ensure optimum benefits.
4. Financial stability and risk profile:
Assess your financial stability and risk profile critically before investing. This will help you make an informed decision.
5. Investment strategies:
Several ULIPs allow various investment strategies like lifecycle-based investments, Systematic Transfer Plans, etc. Choose the best-suited ones.
6. Claim settlement ratio:
This gives you an insight into the total number of claims raised vs. the total number of claims settled. The higher the better.
7. Solvency ratio:
This ratio depicts whether the concerned insurance company is capable of fulfilling its future claims. Choose one with a high solvency ratio.
8. Performance of ULIPs:
Always review the long-term performance of your chosen funds well before zeroing in.
9. Charges:
Opt for plans with affordable charges. A typical ULIP involves policy administration costs, premium allocation expenses, fund management charges, switching costs, mortality fees, etc.
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Conclusion
After careful consideration and critical analysis, you must invest in a ULIP fund to reap optimum benefits.
