Like all other forms of insurance and investment tools, ULIPs too demand your attention and caution when you go to buy them. In order to find the best ULIP, the investor must adhere to the following points-
Analyse the risk attached to the particular investment fund
As mentioned above, different ULIP funds carry different amounts of risks, and hence it is crucial to go as per ones risk taking capacity. Go as per your intuition and don't invest in a high risk fund unless you are sure of getting the returns you aim for.
Check the life cover
Never forget that ULIP is an insurance product in the first place. So, keep a very close eye on the death benefit when buying your ULIP. The correct unit linked insurance plan will offer an appropriate death cover and prove to be highly beneficial for you.
Know your investment goals
Be very sure of the reasons why you want to buy the ULIP. If you aim to buy a house with it, or wish to secure an education corpus for your kids, every investment has a goal. If you know what your financial milestone is, you will be able to invest in the correct ULIP.
Long term investments
Since ULIPs are long-term plans, you can plan your retirement with a unit linked insurance plan. If a sufficient retirement corpus is your aim, choose the plan very carefully.
Comparison
You must compare the different ULIPs to ensure you find the absolute best plan. It is very easy to compare ULIPs online and the process barely takes a few minutes. There are many good online insurance aggregator portals like Coverfox.com where this can be done free of cost. So, compare the ULIPs properly and choose your ideal cover in a methodical and precise manner.
Right amount of Life Cover
The main aim of a ULIP plan is to help you meet your financial goals like saving for child’s higher education, a dream wedding or saving for your retirement. In addition to this, ULIPs also come with a very important feature of providing a life insurance cover to secure the dreams of your dependents. In case of an eventuality, the policy gives out a lump-sum amount to the nominee mentioned in the policy, ensuring the dreams are not squashed in the absence of the policyholder. ULIP allows a minimum life cover of 10 times of the annual premium of the plan. The Life cover multiple is a flexible amount and the investor can select the life cover multiple as per his/her requirements, subject to a limit of a particular plan.
For example, for an annual premium of INR 1 lakh, the policyholder can get a minimum Life Cover of INR 10 lakhs which is 10 times the annual premium. The plan might even offer life cover multiple options like 15 or 20 times the annual premium chosen.
Stay invested in ULIPs for a long term
The main aim of most investors investing in ULIP is to fulfil their long term goals such as buying a new home, starting a new business, going on a dream vacation, etc. The lock-in period of ULIP is 5 years instead of 7 to 15 years in other investment options. The lock-in period helps in instilling a discipline and forced savings habit which bars one from dipping into the invested amount as and when the need arises.
Tax benefits
ULIP not only gives the investor the advantage of life cover, capital appreciation, good returns, but it also has one more crucial advantage of tax benefits. The tax benefit of ULIP comes under the provisions of Income tax Act, 1961. Let’s understand the tax advantage at different stages of ULIP investment.
- Stage 1: Entry Stage
The investor/policyholder can get tax benefits by way of taxable income deduction for the premiums paid under Section 80C of the Income Tax Act, 1961.
- Stage 2: Earnings or capital appreciation stage
The growth or the capital appreciation on the value of investment is not taxable.
- Stage 3: Unique Switching Advantage
ULIP provides unique switching of funds to tackle the volatile nature of market and gain maximum returns. The switch between debt and equity funds is completely tax free in ULIP.
- Stage 4: Benefit payout stage of the plan
Death benefit paid under the ULIP plan is completely tax free under the provisions of Section 10(10D) of the Income Tax Act, 1961. The maturity amount is also tax free as per the conditions stated under the Income Tax Act, 1961.
Know the charges in ULIP
In ULIP, the premiums you pay are invested into the chosen fund i.e. debt and equity investments after deducting all the applicable charges. The charges for ULIP are divided into different categories.
Premium Allocation charges
The policyholder will be charged the premium, which is allocated to the fund chosen by the investor.
Policy administrative charges
These charges are deducted regularly for the recovery of expenses borne by the insurer towards the policy.
Surrender charges
This refers to the deduction for the full or partial encashment of premature units subject to the policy documents. Surrender charges are levied as a percentage of fund value or percentage of premium payments.
Mortality charges
Mortality charges are deducted by the insurer for providing a life cover to insured. The charges will vary with the age and sum assured.
Fund management charges
The insured bears the charges for the management of the funds which are invested in equity, debt or other defined funds.
Fund switching charges
ULIP plans help you to invest your hard-earned money in different funds that have different equity and debt exposures. You can switch between different funds whenever you want to. The insurer bears the charges for switching between funds.
Discontinuance charges
On premature discontinuation, the insurer charges you a small fee. The charges will be the same across all policies as per IRDA.
