Unit Linked Investment Plan(ULIP)
United Linked Insurance Plan abbreviated as ULIP is one of the most popular investment vehicles available today. Several people usually prefer it as it offers the dual benefit of insurance and investment.
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What is ULIP?
Unit Linked Investment Plan (ULIP) is a combination of insurance and investment. In this plan, people can make a monthly or an annual premium. One part of the premium goes towards life insurance, and the other part goes into investment. The investment is made in equities or debts based on the policy buyer’s choice.
The investments made under this plan are subject to market risks. The policyholder bears the responsibility for the investment risk, as it’s made based on his decision. Hence, the policy buyers should choose the investment portfolio based on their risk appetite.
The charges associated with the plan such as fund management charges, allocation charges, etc., are mentioned during policy issuance. ULIP plans also offer the choice for the investors to switch from equity to debt and vice-versa. ULIP plans are popular because of their potential to give maximum returns and comprehensive insurance protection cover for the investor.
How do ULIPs work?
In the Unit-Linked insurance plan, a portion of your investment goes into insurance, and the balance goes into funds. The buyer can choose the fund options based on his financial capability, investment goals, and risk appetite. In the event of an unfortunate demise of the policyholder within the policy period, then his nominees would receive the life insurance cover, and/or fund value, whichever is higher based on the plan type.
The companies would give fund units to the policyholder, similar to mutual funds based on his/her proportion of the investment. The policyholder’s units represent his investments and are allocated a NAV, which varies daily.
Benefits of ULIPs
Listed below are the benefits of buying a ULIP,
Savings, insurance, and investment
ULIPs serve a trifecta of purposes with savings, insurance, and investment. Investing in ULIPs helps you develop saving habits, especially with a focus on generating long term wealth. Since ULIPs come with the dual benefit of insurance and investment, you can avoid paying for them separately.
Long term finance goals
If you have a long term goal like buying your dream house, starting your own business, finance for your child's higher education, then ULIP is a great investment option. As the money gets compounded, the returns are higher. It is true even if you want to exit the plan after the lock-in period, as the returns are higher than what you can earn in savings or a bank fixed deposit. Generally, it is advised to retain the policy till the completion of its tenure to reap its full benefit.
Income Tax Benefits
The premium paid towards a ULIP plan is eligible for tax deduction under Section 80C of the Income Tax Act. Moreover, the returns upon maturity qualify for tax exemption under Section 10(10D) of the Income-tax Act.
Flexibility
Some ULIP plans come with a flexible option to switch your portfolio between debt and equity funds based on your risk appetite. You can analyze the market situation and convert it accordingly.
How to Choose ULIP?
A potential buyer should analyze several factors before choosing a ULIP Plan. Mentioned below are a few pointers which would help you to choose the best ULIP Plan.
Investment Goals
Your investment goals play a significant role in choosing the most appropriate ULIP Plan. Careful planning and framing your investment goal with forethought about inflation would help you choose the best plan. Your investment goal may be building a retirement corpus, and generating funds for your children's education or marriage. The first step to selecting the best ULIP plan is to have a clearly defined investment goal.
Insurance Goals
Next to the investment goal, having an insurance goal is essential. The insurance cover should be selected, keeping in mind your age, number of dependents and your family's financial needs. If you are young, you would probably need a large insurance cover to avert a financial crisis for your family in the event of your unfortunate death. You should consider the right ULIP plan that secures the economic future of your family.
Flexibility
Another critical factor that comes is the flexibility offered by the ULIP plan that you selected. Tenure: Most ULIP Plans are long-term. As a result, they come with a lock-in period of 3-4 years. The investors should consider the ULIP Plan's term, as they have to pay a premium till then. Investment: The investors have to choose the investment options even before selecting the ULIPs. Be sure whether you want to invest in debt, equity or hybrid ULIP Plans.
Risk appetite
As mentioned, the investment in ULIPs is subject to the capital market conditions. Generally speaking, young people have a high-risk appetite so they can go for equity ULIPs. Conservative investors who are averse to risk can go for debt ULIPs that provide limited but stable returns.
Understand the features of the plan
Every ULIP plan has its unique set of features that sets them apart. It is essential to analyze the pros and cons of multiple plans to narrow down to the best plan that suits your investment/insurance objective. Only when you are aware of the plan's full features can you choose the best one. It is the main reason we advocate for the purchasers to read and understand each policy's terms even as we show you relevant results based on your inputs.
Analyze the performance of the plan
It is vital to find how the ULIP Plan you have decided to buy has performed over the past three to four years. It will give you an idea about the returns that you can expect from the plan. Also, it is essential to periodically track the fund's performance so that you can make a better investment decision and gain maximum returns at the end of the tenure.
Claim Settlement Ratio
Claim settlement ratio refers to the number of claims settled by the company with respect to the number of claim requests received by the company. The higher the claim ratio, the trustable the company is.
Compare Different ULIPs
Every ULIP has its own set of features and benefits. You should compare various ULIPs to find the best one that suits your requirement. You can make a thorough comparison through a site like Zeker International, which gives you an option to compare various plans.