A unit-linked insurance plan, or ULIP, provides both investment and insurance benefits. In other words, the premium for a ULIP is split into two portions: one portion is used to purchase life insurance, and the other portion is used to purchase investments in money market instruments. You can obtain insurance and invest your way to a sizeable fortune with the aid of a ULIP plan.
How do ULIPs operate?
An investment in a ULIP is split into two parts. The first portion is used to pay the premium for the life insurance policy. For financial gain, the second portion of the investment is placed in debt or equity funds.
Reasons to buy a ULIP right away
- Exemptions from taxes
Section 80C of the Income Tax Act permits tax deductions for investments made in ULIPs. An investor’s ULIP investments are eligible for ULIP tax benefits of up to 1,50,000 per year. Similarly to this, Section 10(10D) of the Income Tax Act exempts the returns you get when your ULIP policy matures from taxation. Additionally, Section 10(10D) of the Income Tax Act exempts the sum received by the nominee following the passing away of the policyholder.
The tax benefits mentioned in the article may not apply if you opt for the new tax regime since many tax exemptions and deductions have been scrapped within the new regime. They are also subject to any changes in the law.
- Flexible investment alternatives
ULIPs provide a variety of investing possibilities. This adaptability manifests in the form of
- Fund switch: Based on your risk tolerance, you can switch between various funds, such as balanced, debt, or equity funds. You can raise the percentage of investments in equity funds if you want to take a high-risk approach to your investments.
- Top-up choices: Top-up choices let you increase the amount you put into your current savings.
- Premium redirection: Redirecting your premiums into alternative funds in the future is possible with premium redirection.
- Sum assured
When you purchase a ULIP, the insurance coverage ensures that, in the event of the policyholder’s untimely passing away within the insurance period, a predetermined sum of money will be paid to the nominee. This set sum, known as the “sum assured,” is not deductible for tax purposes, thus offering ULIP tax benefits.
- The lock-in period withdrawal facility
Typically, during the lock-in period, when you make any investments, you are not permitted to make any partial withdrawals. You will be able to withdraw money throughout the lock-in period, thanks to ULIP perks. Nevertheless, when you make such withdrawals during the lock-in period, certain fees and deductions are deducted from the amount.
- Greater potential for returns
When compared to other investment options, ULIP returns have a higher potential for financial gain. These excellent results are possible due to the flexibility provided by equity and loan funds. Similarly to this, by “staying invested” in ULIPs, you become eligible for specific benefits and bonuses. Insurance companies provide bonuses in the form of loyalty or wealth enhancements. With ULIP plans, you can also avail of ULIP tax benefits.
- Benefits of long-term growth
Lengthy-term advantages can be obtained by paying ULIP premiums over a long period of time. If you do this, your money will be invested in the market for a long time, generating larger returns for you. If you plan ahead, you can utilise this money from the ULIP’s long-term benefits for particular things like paying for your kids’ college. The ULIP calculator is a simple tool that you can use to predict the return you might get at maturity by entering a few details.
Considerations before purchasing a ULIP
- Claim Settlement Ratio
The percentage of a claim that is settled by the ULIP provider is known as the claim settlement ratio. The claim payment amount when the ULIP matures is better, and the greater the ratio.
- Performance of the Funds
Investments in ULIPs are market-linked. As a result, market movements can affect the funds you invest in (equity, balance, or debt). Therefore, make sure to compare the historical performance of these funds to the relevant market benchmarks before making your investments. Your decision regarding the level of risk tolerance for your ULIP investment can also be aided by reviewing the fund’s performance.
- Premium payment period and lock-in period
You need to be aware of your ULIP plan’s premium payment and lock-in periods. The total number of years you must pay premiums is the premium payment premium. On the other side, the lock-in period is the minimal time frame necessary for a strategy to mature. The lock-in duration for ULIPs is five years. It implies that you will have to wait until the insurance has matured for five years before it starts to pay off. The estimated value of your ULIP investment can be calculated using a ULIP calculator based on the premiums, tenures, and other information you enter.
Insurance is the subject matter of solicitation. For more details on benefits, exclusions, limitations, terms, and conditions, please read the sales brochure/policy wording carefully before concluding a sale.
