Buying the right insurance with adequate cover is an integral part of financial planning. Insurance companies offer a host of products to suit your insurance and financial objectives. One such unique product is the Unit-Linked Insurance Plan (ULIP).
ULIPs are unique because they combine insurance and investment. While they offer you protection, they also help in wealth creation.
A Brief about ULIPs
A basic understanding of the meaning of ULIP will help you grasp how they work more clearly. The insurance company pools money from you, the ULIP buyers, and invests it in various funds chosen by you.
The company divides the entire corpus into units and allocates these to investors, proportionate with their invested amount. The value of units varies with the fund performance and the market condition. This is known as the Net Asset Value (NAV).
How Do ULIPs Work?
- Before you make the purchase, you should be clear about what the particular ULIP means and entails. Be thorough about certain aspects such as how much life cover you want, how much premium you can pay, and the policy term, as per your financial objective and needs.
- If you plan to buy a ULIP for a particular financial goal like your children’s education, you can use a ULIP calculator to plan your investment. The ULIP calculator can help you calculate how much you need to invest and the duration, based on your child’s age and the corpus you wish to save up for them.
- You can choose the payment frequency based on your convenience. You can pay the premium monthly, semi-annually or annually. You also have the option to opt for recurring payments or pay a lump sum amount upfront.
- The insurance provider uses a part of the premium to provide you with life cover. This is the insurance part of your ULIP.
- The company invests the remaining part of the premium in equity, debt or balanced funds, based on your preference.
- Equity funds invest in the stock market. Debt funds invest your funds in bonds, government securities or other products that offer low-risk returns. Balanced funds combine risk with stability and channel funds in both debt and equity.
- Your investment in these funds determines the value of your ULIP. They do not offer guaranteed returns. Instead, they offer estimated returns based on past performance and various projections.
- You can switch from one fund to another based on the market or fund performance, or changes in your risk appetite or your financial goals.
- ULIPs are designed to create wealth over the long term. You are likely to get better returns if you stay invested for a longer term. A ULIP calculator can help you estimate the difference in the accumulated corpus based on the number of years you remain invested.
- At the end of the maturity period, you receive the accumulated fund value.
- In the event of an unfortunate incident during the policy term, your nominee gets the sum assured or the fund value, whichever is higher. This helps them remain financially secure.
An Example to Clearly Understand What ULIP Means
You buy a ULIP for 10 years for an annual premium of Rs. 40,000.
Initial sum assured Rs 4,00,000 (yearly premium x 10)
Annual charges Rs 2,000
Amount invested Rs 38,000
NAV (at inception) Rs. 10
No. of units allocated 3800 (38000/10)
The above illustration is only for example purposes; the initial sum assured and the annual charges may vary as per the company policies.
Benefits of ULIP
ULIPs are a three-in-one product. Their unique features help you fulfil three aspects of financial planning and offer various benefits.
- Insurance: ULIPs provide risk cover, an integral part of financial planning. They offer a financial security net to your family in case of an unfortunate event.
- Goal-based investment: ULIPs help you in wealth creation over the long term. This means you can save sufficiently for a particular goal like retirement, your child’s future, and so on. A ULIP calculator will help you plan your goal-based investment. As they have a lock-in period of five years, ULIPs encourage you to remain invested and enjoy the magic of compounding over the long term.
- Tax benefits: Your investment in ULIP is eligible for deduction from your taxable income according to Section 80C and as per your tax slab. The upper limit for it is Rs. 1.5 lakh. The maturity proceeds from ULIP were tax-exempt under Section 10 (10D) earlier. As per the Budget 2021, gains from ULIPs when the premium is above Rs. 2.5 lakh per annum are taxable.
- Flexibility: ULIPs offer you flexibility in investment and payment. You can choose to invest in debt, equity or a combination based on your risk appetite. You also have the flexibility to switch from one fund to another. They also offer flexibility in payment frequency.
ULIPs can help you in wealth creation, tax planning, and also offer you risk cover. You must understand ULIP’s meaning and its features in detail before investing in it. Use a ULIP calculator to know, quantifiably, how feasible the plan is for you. Always compare various products, so that you pick one that suits you the best.