Unit Linked Insurance Plans (ULIPs) are financial products that insurance companies offer to people interested in investing in insurance and investment under a single plan. ULIP plan subscribers get the dual benefit of life cover through insurance and through investment in equities or debt fund or both.
- Like any insurance policy, a subscriber needs to pay premiums for the ULIP that they have subscribed to.
- Part of the premium goes to insurance coverage, and the remaining amount gets invested into market linked funds, as per the subscriber’s chosen plan.
- The subscriber is allocated units of the plan chosen in proportion to the amount invested. The value of each unit is known as Net Asset Value (NAV).
- The subscriber can track the performance of his plan with the help of NAV. Increase in NAV implies a good performance of the plan and decrease in NAV implies a bad performance.
- The subscriber has the facility to make partial withdrawal from the amount invested and a corresponding number of units are sold. Typically, facilities such as these can be availed only after a lock-in period of 5 years.
- At the time of maturity, the subscriber can receive the total value of the fund as a lump sum or monthly instalments paid over a specified period as per the plan chosen.
- In case of any eventuality during the policy period, the nominee will receive the benefit of insurance cover as per terms and conditions.
- There are various charges like premium allocation charge, fund management charge, mortality charges, policy administration charge, surrender charge, premium redirection charge, switch charge, which will be disclosed in the policy brochure and premium paid statements.
The benefits of investing in ULIPs
- High transparency: ULIP investments are transparent as every rupee invested can be traced through the statements, including various charges levied.
- Flexibility: Investors have the flexibility to change their fund allotment, thus reducing or increasing their risk appetite as per their needs which ultimately impactsthe ULIP plan returns. There will be a charge to switch between different funds, which is to be kept in mind.
- Dual benefits: Dual benefitsof capital appreciation in the long run and insurance cover to the policy holder thus securing their future and also their loved ones.
- Tax benefits: Tax benefits of up to Rs. 1.5 lakh per year on all premiums paid as per existing income tax laws, thus making the investment more attractive.
- Free-look period: Investors have the facility of a 15-day free look period. In this period, if the investor is not satisfied with the benefits and features of the plan chosen, they can return the policy.
- ULIP returns: ULIP offers good returns in the long run due to its exposure to equity and debt funds.
- Large corpus: ULIPs help investors to accumulate large corpus for various purposes like retirement, children education, construction of house, accumulation of wealth etc. Thus, investors can choose their plans as per their goals.
Why you shouldn’t surrender your ULIP
It is a known fact that investors receive good market linked returns on the maturity of ULIP. But there will be few investors who wish to surrender their policy before maturity due to various reasons. But it is always advisable to not surrender the policy before maturity. The reasons to hold on to ULIP till maturity are the following:
- Allocation charge: The premium allocation charges decrease as the maturity nears. The amount of money deducted from the premium paid towards premium allocation, fund management and policy administration are higher in the first year of the policy. The above charges will be minimum or negligible to such an extent in the subsequent years that they do not impact the funds.
- Insurance benefit: The benefit of insurance coverage ceases once the policy is surrendered.
- Lock-in period: The funds cannot be withdrawn before the lock-in period. If the policy is surrendered before the lock-in period, there will be charges for surrendering the policy, which reduces the amount to be received.
- Maturity: The funds received on maturity are significantly higher than those received by surrendering a policy.
Hence, it is always advisable to hold a ULIP till maturity for better market linked returns on premiums paid and also to reach your financial goals in the long run.