In all probability, you would have come across the term ULIP. If you haven’t, you are missing out on an interesting investment opportunity. ULIP stands for Unit Linked Insurance Plan and is a plan that provides a combination of both wealth creation opportunities and life cover. Here are some interesting aspects of a ULIP that you should be aware of before investing your money.
- Insurance at its core
A ULIP plan is an insurance product at its core. What it means for you as a policyholder is that the investments provide tax deductions under Section 80C and Section 10 (10D) of the Income Tax Act, 1961. And most importantly, the plan also provides life cover.
One of the USPs of a ULIP is its flexibility. Depending on your risk appetite you can create an aggressive portfolio in search for better returns. Or, you can create a conservative portfolio and seek average returns. You can blend both and create a balanced portfolio as well. ULIPs let you invest on a monthly basis too which is like an SIP or Systematic Investment Plan, that brings discipline to your investment style.
- Internals of ULIP
The insurance premium paid by you is utilised in more than one way. The premium is split between an investment component and a life cover component. Depending on your recommendation, the amount in the investment component is utilized accordingly.
A ULIP plan primarily has four types of expenses that you need to bear. These include premium allocation charges, mortality charges, policy administration charges and fund management charges. As a policyholder you need not pay anything explicitly i.e. over and above, as the insurance premium pays for the charges.
Risk Coverage and benefit offered in Most of the Standard ULIP plans
As mentioned above, the risk profile of your ULIP largely depends on your appetite. An aggressive ULIP plan will invest your premium into the capital market. If you invest in equities, the risk associated is high, and the potential returns are also high. Alternatively, you can also invest in a debt based fund which will give you decent returns without much risk. Thus, depending on how much risk you can absorb you can create a corresponding portfolio.
Here are some of the benefits of investing in a ULIP plan.
You can keep track of your investment portfolio and regularly observe if it’s doing well or not. If there is a scope for improvement, you can always switch between funds so that you are on track for your financial goals. Regular tracking also provides you information such as the value of units and the total number of units that you own.
- Tax Benefit
You can utilise the insurance premium that you have paid for your ULIP plan for tax purposes. Though you can invest as much as you want, an amount of up to Rs.1.5 lakhs in ULIP is allowed for claiming deductions as per the limits of Section 80C of Income Tax Act, 1961. Not only that, the amount that you receive on maturity is also tax free. In the unfortunate event of the policy holder losing his/her life, the death benefits are also tax free.
Since a ULIP plan is an insurance product, you can add riders to it. Riders are essentially additional features on the top of the vanilla plan that let you enhance the capabilities of your ULIP. There is a small price that you need to pay for these riders but for the benefits that they provide, they are minimal.
How ULIP is different than mutual funds and insurance
Fundamentally, mutual funds and ULIPs are quite similar. Both belong to the managed investment category where a team of professionals look after the management aspect of the fund. When you invest money, you get units of the fund. However, ULIP gets an upper hand in the form of life cover, tax benefits (only ELSS mutual funds provide tax benefits), ability to add riders. A ULIP is ideal if you are looking for investment and insurance together and do not have any immediate commitments. ULIPs are best left aside as a long term investment plan and they also have a steep 5 year lock-in period.