A Unit Linked Insurance Plan (ULIP) is a product offered by insurance companies that, unlike a pure insurance policy, gives investors both insurance and investment under a single integrated plan.
Unit Linked Insurance Policies or ULIPs are insurance policies which offer you the opportunity of wealth creation while providing the security of a Life Cover. In ULIPs, a part of your premium is dedicated towards your Life Cover and the rest is assigned to a ../../common pool of money, called fund, which invests in equity, debt, or a combination of both. The returns on your investments depend upon the performance of the fund opted by you.
In Unit Linked insurance policies, you can choose the amount of Life Cover that you want. In most ULIPs, the minimum Life Cover offered is 10 times your annual premium amount. However, depending on the policy and the insurance company, you can select your Life Cover amount as much as 100 times of your annual premium or even higher.
With Unit Linked insurance policies, you also get an option called partial withdrawal+, which allows you to withdraw a part of the money invested in your policy. This option helps you to take care of immediate expenses such as, your child’s 10th, 12th or graduation fees, going on a family vacation, in case of emergencies, etc. Partial withdrawals are usually free of cost.
ULIPs are structured to help you secure your key goals such as wealth creation, retirement planning or saving for your child’s education. So, apart from the life insurance benefit and the wealth creation, ULIPs also give you the added benefit of knowing that your premium is working towards securing your future goals.
Under the Income Tax Act, 1961, you can save tax on your hard earned money by investing in a ULIP. You can get tax advantage at different stages of your life insurance policy.
• Equity Funds: These ULIPs invest primarily in high-risk equities and stocks on companies. They are the riskiest ULIP investment, and also the one offering the highest rewards. If you have a medium-to-high risk appetite, and think that fortune favours the bold – go for one of these plans. If you win here you win big.
• Income,Fixed-Interest and Bond Funds: Under these ULIPs, your funds will be invested in government securities, fixed-income securities, corporate bonds, and the like, which offer a medium and risk, and medium reward.
• Cash Funds: Investments in these ULIPs will see your corpus directed towards money market funds, cash and bank deposits and other money market instruments which are in the lowest risk category.
• Balanced Funds: These are the most stable and prudent investment based on the very fact that they vary the amount of investment that goes to different places. It invests in proportion, and divides the total investible amount between equity investments in high risk equities, company stocks, etc. and fixed-interest instruments which pose a lower risk.
Market risks on a ULIP’s underlying investments are the same as that of mutual funds or direct investments in equities / fixed income securities. This investment risk of the portfolio is borne entirely by the policy holder and will need to be monitored actively. Thus, you should ascertain your risk appetite, financial commitments and funding needs before choosing the appropriate plan.
Charges take away from the value that accrues to you as an investor, which is why it is important to know how much is levied on the fund value. Typically, a ULIP will be subject to minimal administration, fund management, switching and surrender charges.
An investor’s market view, time horizon, and risk appetite will determine the initial allocation but these change over time. ULIPs offer the flexibility of switching between the funds based on changes to each of these factors.The number of free switches during a policy year, the cost of switches and the ease of switching are factors that are important evaluation points when choosing a ULIP.
Since investment returns are not always guaranteed, it is important to know what will be the limitations and exclusions on the sum assured in case of death or permanent disability. The insurance aspect should thus be subject to the same due diligence and scrutiny as the investment aspect.