If you are looking for a financial product that offers you both life insurance and investment returns, you may want to consider ULIPs. ULIPs, or Unit Linked Insurance Plans, are plans that combine the benefits of insurance and investment in a single product. Here, we will explain how ULIP works and what are the factors that influence their potential growth.
How do ULIPs work?
Before going into further details, let’s first understand ‘what is ULIP‘. A ULIP is a dual-benefit financial product that combines insurance and investment. It allows you to invest in various funds while providing life insurance coverage.
Here is how it works:
- When purchasing a ULIP, you select a fund option: aggressive, balanced, or conservative. Aggressive funds invest in equity and carry high risk and return. Balanced funds invest in stocks and bonds, offering moderate returns and risks. Conservative funds invest primarily in debt, which means they have lower returns but also lower risks.
- Next, choose the amount of premium you want to pay, the frequency of payment, and the policy term. The premium you pay includes various charges, such as mortality charge, fund management charge, policy administration charge, and premium allocation charge.
- The remaining amount is used to buy units of specific funds at the prevailing net asset value (NAV). The NAV is the price of one unit in the fund, which changes daily based on the market performance.
- You can switch funds during the policy term, subject to some conditions and charges. This allows you to adjust your portfolio according to the market conditions and risk profile. You can withdraw partially from your fund after a certain lock-in period.
- At the policy’s end, you can withdraw the full fund value or opt for periodic payments. Extending the policy is possible with certain conditions and charges. If you pass away during the policy term, your nominee gets the higher of the fund value or the guaranteed minimum insurance coverage (sum assured).
What are the factors that influence the potential growth of ULIPs?
The potential growth of ULIP investments depends on various factors, such as:
Fund Performance:
The performance of the underlying assets, such as stocks, bonds, or other securities, determines overall fund performance. The fund performance can be affected by various factors, such as market conditions, economic trends, political events, company performance, etc.
The fund performance can also vary depending on the fund manager’s skills, strategies, and decisions. The fund performance can be measured by the returns, which can be absolute or relative. Absolute returns are the actual returns the fund generated over a period. Relative returns are the returns from the fund compared to a benchmark, such as an index or a category average.
Fees and Charges
Charges entail costs subtracted from your premium before investing in the fund. These expenses may impact fund performance, your investment’s value, and ultimately your overall returns. The charges can differ based on policy type, fund option, premium amount, payment frequency, and policy term. They include mortality charges, fund management charges, policy administration charges, premium allocation charges, switching charges, partial withdrawal charges, surrender charges, etc. These costs can be fixed or variable (changing based on market conditions and policy performance).
Tax Benefits
The tax perks can vary depending on the policy type, the fund option, the premium amount, the payment frequency, and the policy term. It can also vary depending on the tax laws and regulations, which can change occasionally. The tax benefits can include:
- Deduction under Section 80C: You can claim up to ₹1.5 lakh from your taxable income for the premium you pay for ULIPs, subject to some conditions and limits. The conditions and limitations can include the sum assured being at least ten times the annual premium, the premium being less than 10% of the sum assured, or the policy term being at least five years.
- Exemption under Section 10(10D): You can claim an exemption from tax on the fund value or the sum assured that you receive at the end of the policy term or on death, subject to some conditions and limits.
Additional Benefits
ULIPs may offer additional benefits, such as life insurance coverage and riders. These can affect the overall cost and, consequently, the growth potential.
Lock-In Period
Some ULIPs have lock-in periods during which withdrawals are restricted, encouraging calculated financial management. The length of this period can impact access to funds and, subsequently, growth.
Policy Term
The length of the ULIP policy term influences growth. Longer-term policies generally have more time to weather market fluctuations and potentially accumulate greater wealth.
Conclusion
ULIPs combine life insurance with investments in one product. You select a fund, pay premiums, and receive fund units. Your investment’s value depends on fund performance, charges, and tax benefits. ULIPs help you achieve long-term financial goals like retirement or education while providing life coverage. Yet, they come with risks like market, liquidity, and policy risk. So, understand ULIP features and drawbacks before investing. Compare different ULIPs online using tools like calculators, tables, and reviews. ULIPs suit those seeking long-term investments with insurance and tax benefits. However, it is recommended that you choose a plan that suits your risk tolerance and financials.
