What is  ULIP? What are its Benefits and Returns?

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A ULIP is a Unit Linked Insurance Plan that combines insurance with investment. When you buy a ULIP, you pay regular premiums to the insurance company. The company utilises part of the premium to provide you insurance cover and invests the remaining portion. What’s more, investment in ULIPs also provides tax benefits under Section 80 C and 10D.

How do ULIPs work?

The insurance provider uses a portion of your premium to invest in mutual funds. Fund managers, responsible for managing the fund, invest the pooled assets in equity, debt or hybrid funds based on the specific fund investment objectives. They track the markets and investments closely to maximise your returns.

You are allotted units of the fund in which you invest. There are mainly five costs associated with a ULIP. They are charges for premium allocation, fund management, mortality, policy management and switching.

What are the benefits of investing in ULIP?

There are many investment options available in the market, and you can choose a combination of products per your financial plan and goals. A report in a leading newspaper explains why ULIP should be a part of your investment portfolio. We discuss a few benefits of ULIPs below:

1.   Power of two

Buying the right investment products and adequate insurance cover are crucial aspects of any financial plan. When you buy a ULIP, you don’t have to purchase separate insurance and investment products. The right ULIP will provide you insurance coverage to keep your family safe and help you fulfil your financial goals with wealth creation.

1. Triple benefits

A unit-linked plan combines its dual benefits with a triple tax advantage. Your investments in a ULIP are eligible for a tax deduction U/S 80C of the Income Tax Act 1961 up to a limit of Rs 150,000 per annum.

The returns you receive on maturity are also exempt from any tax under section 10D.  If you make partial withdrawals after the stipulated lock-in period, you do not have to pay any tax if the withdrawn amount does not exceed 20% of the fund value.

As per the provisions of section 10(10D), the nominee does not have to pay any tax on the amount received after the policyholder’s demise.

The Budget 2021 introduced an amendment to this section. Now, the exemption is available only if the annual premium does not exceed 2.5 lakh per annum.

As per a report, the popularity of ULIPs has not reduced after these changes. On the contrary, sales have picked up.

1. Flexibility

Unit linked insurance plans offer you flexibility in the following ways:

• You can choose a fund based on your risk appetite. You can pick an aggressive fund or a conservative fund, or one that lies midway.
• You can switch your investments from one fund to another depending on the change in your risk appetite, fund performance, market conditions or a change in your financial goals. This “switch” can be partial or total, as per your choice.
• You have the flexibility to invest more in a fund if you have surplus funds or a fund is doing well.
• You can get additional benefits by paying higher and opting for riders like critical illness etc.
• You also have flexibility in premium payment; you can pay a lump sum amount or pay annually, semi-annually, quarterly or monthly.

1. Long-term goal-based saving

ULIPs offer an opportunity to save for a long-term goal. Some goals for which ULIPs are beneficial are:

• You can plan your retirement by paying premiums while you are employed.
• With a ULIP, you can secure your children’s future. You will receive benefits at crucial milestones and, in case of any unfortunate event, your child’s education does not suffer.
• ULIPs also help in wealth creation in the long-term; you can use the accumulated corpus at different junctions of your life.
• Special riders can offer protection against major illnesses or critical illnesses.

What are the returns on a ULIP?

After the revised norms and cost structure introduced in the year 2010, ULIPs have become more customer-centric. The first thing to remember about ULIP is, they are market-linked plans, so they cannot offer you guaranteed or fixed returns.

Historically, stock markets deliver higher returns in a longer duration. Starting early helps you in creating more wealth. Here are a few ways in which you can maximise your returns on ULIP:

• ULIPs have a lock-in period of five years; do not exit after the lock-in period is over. You should invest in a unit-linked product with a long-term horizon as they are designed to yield good returns over the long term.
• Staying invested over the long-term helps in wealth creation with the magic of compounding working in your favour.
• Follow a disciplined approach to investing; do not miss your premiums or allow the policy to lapse.
• Staying invested during a low market phase is crucial to fulfilling your long-term goals.
• Invest keeping your risk appetite in mind. You can choose from the following; an equity fund that offers high-risk and high returns, a debt fund that offers low-risk and low-returns, or a hybrid fund that combines both. You can use a ULIP calculator to calculate returns and make an informed choice.
• You can switch between funds depending on your life stage and also the fund performance. If you are a 30-year-old investor, then equity funds would be a better option for you, while if you are 55 years, then debt funds are a viable option.

The following is the 5-year returns’ data of various categories of ULIP.

Conclusion

Unit Linked Insurance Plans offer multi-fold benefits and can help you fulfil your financial goals. You should always invest after you understand the product details well. Compare products and research well and choose a product that suits your needs and not the one that appears to be the best or is the flavour of the season.