ULIP or Unit linked insurance plan is a market-linked Insurance product that combines the very best of two – investments and insurance into one. The exciting feature of combining investments and insurance into ULIPs has brought a revolution in insurance market in India and it is now one of the most preferred choices among various life insurance products.
How do ULIPs work?
Like any other insurance plan, you need to pay premiums in ULIP. The minimum premium paying term is 5 years. However, unlike other insurance policies, the premiums paid in ULIPs are invested in a fund of your choice after deducting specified charges. These are mainly on account of mortality charges, policy administration and fund management charges.
Post investment in the fund of your choice, units are allotted to you based on the NAV (Net asset value) on the date of your investment. For example – you have paid Rs 100,000 as ULIP annual premium for 20 years, the ULIP plan will give you a life cover of Rs 10Lakhs (Life cover is minimum 10 times of the annual premium as per IRDA guidelines). After specified charges are deducted say, Rs 3,000 the amount of Rs 97,000 is invested in the fund chosen. Suppose the fund NAV is Rs 15.25 on the day you invested, so you will get 6360.6557 units(Rs 97,000/NAV of Rs 15.25).
You can check the fund performance which is reflected in the growth of the Fund NAV. The fund NAV is computed as follows –
(Market value of investments held by the fund + Value of current assets – value of current liabilities) / number of units existing on valuation date
Salient Features of ULIPs
Life Cover – As per IRDA (Insurance Regulatory and Development Authority of India) guidelines, insurance companies have to provide a minimum life cover of 10 times of annual premium in ULIPs in order to get you the tax benefit under Section 80C of the Income Tax Act 1961.
Many fund choices – You can invest in fund of your choice based on your risk profile and investment objective. You can select growth funds which invests in equities or balanced funds, which invests in both – equities as well as bonds or money market instruments.
Rebalancing your asset allocation – Some companies also offer ‘Automatic Asset Allocation’ feature in ULIP. In this unique feature, the allocation to equities reduces and increases in debt/ money market instruments as the policy term progresses. With this strategy, as your policy gets closer to maturity, funds flow from equity assets (which is riskier) to debt and money markets instruments (which are less risky), thereby protecting your investments from any short term market fluctuations.
No hidden charge – The premiums paid are subject to specified charges which is available to the policy holder when he is buying the ULIPs. Therefore, it is completely transparent. You should buy a ULIP policy where the charges are minimal.
Switching facility – ULIPs provide unique switching facility between funds. This facility is free of any charges and helps you decide which fund to remain invested with depending upon the market conditions.
Partial withdrawals – Partial withdrawals are allowed from 6th policy year onwards. This helps you meet your sudden financial requirements without hampering the plan continuity.
Tax benefits – Like other Insurance plans, premiums paid upto Rs 150,000 in a FY qualifies for tax deduction under Section 80C of the Income Tax Act 1961. Since ULIPs are insurance plans, maturity proceeds along with gains are also tax-free under Section 10(10d) of The Income Tax Act.
Enhancing your hard earned money is as important as earning it. As you make efforts to create wealth, you can count on ULIPs to grow it sustainably. As we have seen the choice of automatic asset allocation feature of some of the ULIP plans ensures that you can grow your wealth at sustainable rate based on your desired asset allocation at different life stages.
Insurance is the subject matter of the solicitation
by Priyanka Chakrabarty, at https://www.advisorkhoj.com/articles/Life-Insurance/ULIP-could-be-a-good-choice-for-wealth-creation