ULIPs combine investment and insurance, which is an advantage in some ways, but also confusing.
Unit Linked Insurance Plans (ULIPs) are one of the most versatile yet misunderstood financial products in the Indian context. Let’s dive deeper into these plans and what makes them so flexible yet controversial.
ULIPs are investment products with an added layer of life cover. You pay the insurance company a certain premium, some of which goes towards providing you with a life cover. And the rest of it gets invested in the markets, as per your choice, in funds offered by the insurer. At the end of the policy term, you get back the fund value; basis market returns and the fund performance. And, of course, your family receives a payout in the event of death.
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So, ULIPs combine investment and insurance, which is an advantage in some ways, but also confusing. It is essential to understand that ULIPs are not pure life insurance. If you are looking only for life cover, buy a term plan. ULIPs are not purely investments either. If you have a short to medium-term horizon and want to maximise your returns, you will probably be better off buying mutual funds. However, if you have a long-term horizon, you should look at investing some of your money via ULIPs for the following reasons:
Tax Efficient: In general, ULIPs help you save taxes. Premiums, up to Rs 1.5 lakh p.a. and, under specific terms and conditions, are tax-deductible. Maturity benefits, up to specific amounts of premiums and terms and conditions, are not subject to capital gains. And any death benefits are entirely tax-free for your nominees.
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Diversified Investment Options: ULIPs offer various fund options where your money can be invested—equity, debt, balanced, and usually more specific funds as well. You can choose your asset allocation and corresponding fund options basis your risk appetite and goals.
Flexibility: Asset allocation is dynamic; over time, you will keep switching your funds between equity and debt or vice versa. Doing this on your own or through mutual funds can get cumbersome and expensive. ULIPs usually offer you several free switches, which can be conveniently executed online.
Bonuses: Some ULIPs offer additional bonuses, which are added to your fund value if you hold the ULIP for more extended periods. Many offer a choice of health riders that you can purchase for additional protection. These are all valuable and convenient benefits if you opt for them.
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Partial Withdrawals: While ULIPs have a lock-in period, you can partially withdraw some of your money if you need funds after that.
Peace of Mind: Lastly, regulations for fund management for insurers are generally more stringent than the ones faced by mutual fund managers. Insurers also manage money with a much longer horizon and tend to be more conservative. From a long-term perspective, having some percentage of your wealth managed by them is a good idea.
Of course, this comes at a cost, and ULIPs levy various charges, which can all add up. But the costs average out if you have a long-term horizon, as you must for a product like a ULIP.
When managing your investments, you need to have a diversified portfolio across asset classes and products, and ULIPs should be a part of that. Only invest a portion of your assets in a ULIP and give it patience and time; it will provide you with the protection, returns, and peace of mind you need.
