Looking to secure your long-time financial goals? Then a ULIP investment is your best bet. Learn more about ULIPs and the various types of plans available today to help you achieve your goals.
ULIP or the Unit Linked Insurance Plan is a unique investment product that offers the benefits of both life insurance and investment. The ULIP plans are designed with the objective to meet and secure your long term financial goals.
The first ULIP in India was introduced in 2001 by Unit Trust of India and was a combination of insurance and investment products. The premiums in ULIPs are split to provide life insurance coverage and investments in equity and debt instruments or a mix of both in varying proportion.
How Do They Work?
In ULIP plans, the policyholder gets the flexibility to choose from the fund option, either equity or debt, or a mix of both (hybrid), based on their investment goals and risk appetite.
The fund corpus is divided into units with a certain face value and is allocated to the policyholder, similar to mutual funds. The value of each unit is represented as Net Asset Value (NAV), and changes according to the change in the value of the underlying assets.
Useful Benefits of ULIP Investment
Being an insurance-linked investment product, ULIPs have emerged as the top choice for retirement planning, children's education & marriage and any other specific long term financial goal.
Some of the useful benefits of ULIP plans are:
Freedom to Choose Life Cover
The policyholders of ULIPs can choose the quantum of life cover according to their requirements. In most ULIPs, the minimum sum insured is often ten times the annual premium. However, you can increase the minimum sum insured to as much as 40 times or higher, depending on the policy and insurance company.
The benefit of Market Linked Returns
Compared to other insurance schemes where the returns are fixed and predetermined, ULIP plans offer an opportunity to earn better market-linked returns over the long term. Despite being a market-linked insurance cum investment plan, the risk cover is assured and is not affected by any adverse market conditions.
Flexibility to Choose Investment Type
ULIPs offer its investors the privilege to choose from a range of investment plans according to their risk appetite and investment goals.
There are basically three types of funds offered to investors- Equity Funds, Debt Funds and Balanced Funds (mix of both equity and debt), from which one can choose.
Additionally, ULIPs also offer an opportunity to exercise the option "Switch", through which one can change the type of fund, and move their entire holding to a new portfolio depending on their investment goals. The option can be exercised once a year free of cost, and for additional switches, a marginal fee is charged from the policyholder.
Availability of Liquidity
ULIPs offer the benefit of partial withdrawal after a certain period of remaining invested in the plan. This option allows you to take care of immediate important financial needs like funding your child's education (10th, 12th, graduation fees), medical emergency, or any other emergency expenses.
Partial withdrawal is allowed as per the terms and conditions of the ULIP policy, and the usage of options is limited to a certain number during the lifetime and only after completion of the lock-in period.
Premium Top-up Facility
ULIP plans give its policyholder the benefit of the top-up facility on premium, through which they can invest over and above against thier regular premium.
The top-up premium facility can be utilized anytime during the lifetime of the policy to take advantage of the well-performing ULIPs. Top-ups increase the investment component to provide greater advantage of the market-linked returns.
Ideal for Goal-Based Investing
ULIPs are best suited for securing key long-term goals like retirement, child's education & marriage, purchasing a new house and other important life goals.
By investing in ULIP, one get the benefit of compounding, which results in higher net returns. Staying invested for whole policy duration (15-20 years) helps an investor beat the short-term market fluctuations, plus the benefit of risk-coverage.
ULIPs offer greater transparency compared to any other traditional insurance and investment products.
With ULIPs, the insurer needs to share the various fees, and charges levied under different fund types and how they are going to affect the returns, which allow them to make an informed decision.
Tax Benefits of Investments in ULIPs
ULIP Plans offer large tax benefits to policyholders under different sections of the Income Tax Act, 1961.
Tax Benefit on Investment/ Premium
Premiums paid on ULIPs can be claimed as a tax deduction under Section 80C (life insurance) and 80CCC (pension). The maximum deduction allowed under both the sections is Rs 1.5 lakhs, inclusive of service tax and any other fees charged by the insurer. Following are the conditions to be eligible for availing tax deduction:
- The policy premium amount should not exceed 10% of the sum assured.
- You need to continue the policy for at least five years to become eligible for the tax benefit. If the policy is discontinued before five years, then tax benefit is not allowed under Section 80C, and the deduction allowed the previous year will get added back to your income in the year of policy termination.
Tax Benefit on Maturity
The entire maturity proceeds from ULIPs are tax-free under Section 10 (10D) of the Income Tax Act. However, the annual premium amount should be equal to, or less than 10% of the sum assured to be eligible to take this tax benefit.
Further, ULIPs are exempted from the purview of LTCG and are the only market-linked investment scheme that enjoys this benefit. The proceeds from Death-Benefit are tax-free in the hands of the nominee.
ULIPs are an ideal wealth-creating tool for your long term financial goals. The market-linked investment growth with the benefit of life cover provides a superior edge over other investment products like mutual funds, ELSS and fixed deposits.
Moreover, its dual tax advantage, tax-deduction of up to Rs 1.5 lakh under Section 80C and tax-free maturity proceeds make it a profitable investment product for the long term.
Because of its unique benefits, ULIPs are suitable for all age-group of investor and type of investor profiles, whether risk-taker or risk-averse investors.