Unit Linked Insurance Plans, often known as ULIP, enable you to combine insurance and investing into one product. It gives you a life insurance policy and enables you to profit from the stock market, debt funds, or possibly both, depending on the circumstances.
Since its founding in 1971, ULIPS has advanced significantly. The Unit Trust of India (UTI) created the first ULIP in 1971, followed by the Life Insurance Corporation (LIC) in 1989.
How does ULIP work?
ULIPS are products that give you access to both a life insurance policy and a mutual fund investment opportunity in one package.
Since life insurers are the ones who provide ULIPS, the payments you make to them when you purchase a ULIP plan are referred to as “premiums,” as ULIPS are primarily more akin to insurance plans.
Your premium is divided into an investment component and a mutual fund component, depending on whether you need equity, debt, hybrid, or another type of fund.
What is the lock-in period of a ULIP?
The lock-in term for ULIP insurance plans is five years. However, ULIPs should be held for at least 15 years because they combine a life insurance policy with a mutual fund, both of which are long-term investments.
Costs:
Premium Allocation Charges
These fees cover the costs the insurer incurred in order to underwrite and market the plan to you.
- Fund Management Charges
These fees, which the insurer deducts for managing the money in your ULIP plan, are capped by the IRDAI at 1.35%. Before the insurer determines the fund’s net asset value, FMC are subtracted.
- Mortality Charges
To administer the insurance component of the product, the insurer imposes certain fees. The amount of these fees is determined by the insured’s age, health status, and the type, quantity, and length of the desired life insurance policy.
If the insured does not live up to the insurer’s projected age, mortality costs provide the insurer compensation.
- Policy Administration Charges
As the name implies, these fees are subtracted to pay for all the administrative tasks the insurer performs to keep your policy in force.
- Switching Charges
If you want to switch between funds in the ULIPS investing section, your insurer may charge you. The insurer may charge a changeover fee, for instance, if you previously invested in an equity fund and now want to convert to a debt or hybrid fund.
- Surrender Charges
When you prematurely withdraw, an insurer assesses surrender fees, and the fees vary depending on whether you withdraw before or after the lock-in period.
Types of ULIPS:
ULIPS are classified according to the type of mutual fund that the product is linked to. These are some examples of ULIP funds:
- Equity Funds
Such ULIPS invest the majority of their money in stocks of different companies or other equity- or equity-oriented assets.
- Debt Funds
ULIP intends to invest the premiums in bonds, government securities, money market instruments, and other similar debt or money market products.
- Balanced Funds
The premiums in this case are placed in a mix of debt and equity market instruments.
Risks associated with ULIPS:
The risk associated with ULIP plans will depend on the type of fund attached to it.
For example, an equity fund is riskier than a debt fund, while a balanced fund shares the risk between the mix of equity and debt portfolios. The ULIP plan will carry the risk factor accordingly. ULIPS are also riskier when compared to other investments.
For example, ELSS, which also falls under section 80C, is a more diversified investment and is less risky.
If you compare ULIPS to a standalone insurance plan or a mutual fund product, then the former will carry greater risks.
This is why.
The cost structure of ULIPS makes it pricey and makes it challenging to obtain returns that will allow you to recoup your costs and add additional money on top of that. We can infer that the risk factor is higher for ULIPS because they are more expensive.
Tax Benefits:
Up to a maximum of Rs. 1.5 lakh, the investment in ULIPS may be used to claim a tax deduction under Section 80C of the Income Tax Act.
In addition, section 10(10D) of the Income Tax Act exempts the policy’s returns from taxation when they mature.
What Are The Pros and Cons of investing in ULIPS:
Pros:
Switching: During the term of your ULIP plan, you have the freedom to switch between equity, debt, or mutual funds as necessary.
Tax Benefits: Section 80(C) of the Income Tax Act allows deductions for investments made in ULIPS, however section 10(D) of the Act exempts policy returns from taxation when they mature.
Cons:
Benefits of Standalone plans: Even after taking into consideration the investment you make in each of them, all counsellors agree that if you purchase life insurance and mutual fund plans individually, your odds of receiving the true advantages of both are significantly higher than those of purchasing a ULIP.
Variable returns: ULIPS may produce positive returns for you due to the investing component, but the extended string of expensive charges can occasionally reduce those gains.
Volatile returns: The returns on ULIPS are likewise quite erratic, but this is true of any investment with an equity component.
Additional links:
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