Heard about investment options that offer you insurance cover too? Unit Linked Insurance Plans or ULIP schemes are plans that offer dual benefits of an insurance cover and returns, via investments. These plans are floated by insurance companies to gather funds from investors, a part of which is used for insurance, with the remaining invested in different categories of instruments like equities and bonds. Investment in these insurance schemes is also eligible for tax benefits under Section 80C of the Income Tax Act. Let us find out more about these plans, their features, and the benefits of investing in them.
How Does a ULIP Work?
A Unit Linked Insurance Plan or ULIP involves the policyholder paying a regular premium, one part of which is used for the insurance purpose while the remaining portion is invested to generate returns. The investment can be in stocks or debt instruments or a combination of both, depending on the policyholder’s or investor’s risk-bearing capacity. Most insurance companies allow policyholders to switch from one investment mode to another, albeit for a specific number of times. This means the policyholders can choose the investment instrument according to their goals and risk-taking capacity.
Some features of ULIPs are:
- The policyholders need to pay additional charges like the administration charges and fund management charges.
- ULIPs generally have a lock-in period of 5-7 years.
- A ULIP scheme offers different investment options to cater to the requirements of their policyholders with different abilities to take risk. Investors willing to take a higher risk can choose to invest in equities while risk-averse investors who are looking for only steady returns can invest in debt instruments.
- ULIP policyholders have the option to switch their funds between equity and debt investments to meet their changing financial goals. The use of a ULIP return calculator can help them know the returns from various options.
- ULIP charges, like allocation charges and fund management charges, are disclosed to the investors.
- Investments in ULIP are eligible for tax benefits under Section 80C.
- The life cover promised by the insurance company at maturity remains unchanged, irrespective of the returns on investments made.
- The plan can be closed early, or a portion of the accumulated funds can be withdrawn (but after the completion of the lock-in period) in case of emergencies.
The meaning of ULIP is better understood when you know that it is a market-linked plan wherein the insurance cover is fixed but the returns on investment depend on the instrument chosen. So, the higher the risk involved, the greater are the potential returns.
Benefits of Investing in ULIPs
Long-term investment in ULIPs can help an individual get insurance cover, earn some good returns to create wealth, and use the maturity value to meet certain goals. Some major benefits of buying a ULIP are:
- Dual Advantage– Investors get a chance to earn some good returns and create wealth, besides ensuring financial safety for their families, even when they are not there.
- Offers the Benefit of SIP– Investment in a ULIP works like a systematic investment plan or SIP
- Flexibility to Switch: ULIPs provide policyholders with the flexibility to switch between funds as per their risk appetite that changes with time and age.
- A Waiver off of Premium– Some insurance companies offer additional features, such as the waiver of future premium payments if the policyholder passes away, without any changes to the validity of the plan.
- Tax Benefits– A policyholder can claim tax deduction under Section 80C on the premium paid. Again, partial withdrawals and maturity amount of the ULIP are exempt from tax under section 10D provided the premium payable in any year of the policy tenure does not exceed 10% of the actual sum assured. This is applicable to policies issued after April 1, 2012. Also, the amount received by the nominee after the policyholder passes away is exempt from Income Tax.
- Option to Withdraw in Emergency- Policyholders can withdraw a portion of the accumulated funds to meet their emergency needs. However, this is allowed only after the lock-in period has ended.
- Enhance the Investment– Policyholders also have the option to make additional investments in ULIPs to enhance the value of their maturity corpus. The additional premiums paid are also eligible for tax benefits.
- Premium Options– ULIPs offer policyholders to opt for either a single premium, which is a one-time payment, or a limited premium on a yearly, half-yearly, or quarterly basis.
There are several advantages of investing in ULIP schemes, but before putting in your money, do check the claim settlement ratio of the insurance company and the performance of the funds in which you are going to invest.