In today’s times, people are often advised to follow the phrase ‘Invest Smart, Insure Smarter’.
The rapidly evolving marketplace has given birth to a wide range of financial instruments, investment arenas and wealth creation sources. Out of the abundant range of options available today, a Unit Linked Insurance Plan has emerged as a unique concept that seamlessly combines two diverse saving methods into one, making it as a dependable choice for investors looking to build wealth while securing their family’s future.
This article dives into the concept and primary benefits of investing in a ULIP, to help you make an informed financial decision.
What is ULIP?
A ULIP, or Unit Linked Insurance Plan, combines life insurance coverage with an investment component. It offers both insurance and investment benefits in a single product. A portion of your premium goes towards life insurance, while the rest is invested in market-linked funds like equity, debt, or a mix of both.
ULIP is well-thought financial product that offers the dual benefit of investment and insurance to fulfil your long-term goals. The full form of ULIP is Unit Linked Insurance Plan. The premiums paid towards a ULIP is divided into two parts.
A part of your premium goes towards securing life insurance coverage, while the rest is invested in market-linked funds of your choice to generate accelerated return. ULIP enables you to achieve your long-term financial goals while securing your loved ones in any unforeseen absence. With a unit-linked plan in place, a person is able to avail financial security and the opportunity to grow your savings.
- You pay a unified premium and gain access to both life insurance coverage and investment opportunities. This streamlines your financial planning to a large extent as ones does not need to juggle between separate insurance and investment policies. Instead, you can enjoy the benefits of both under a single unified plan.
- There are many banking insurance companies that offer complete services related to ULIP. Some of the most reliable and popular banking firms are HDFC Life Insurance, ICICI Prudential Life Insurance, Tata AIA ULIP Plan and many more.
What is the Investment Period of a ULIP?
The duration of a Unit Linked Insurance Plan is typically five years. Policy-holders cannot surrender or withdraw their funds during this period without paying charges. This time frame has been chosen to encourage a long-term investment approach, which leads to wealth creation and insurance planning.
ULIP Fund Value
When you purchase a unit plan, investment in various fund options is possible. The fund value is the total monetary worth of all the units that one owns at any given point. For E.g. you may hold 10,000 units with each unit valued at INR 20. This means the total fund value is 10,000 x 20 = INR 2,00,000.
Benefits of ULIP:
ULIP as a plan offers dual benefits, giving you a double whammy deal of security and wealth. Its magic and utilization in the right manner can help secure and multiply the money. Some popular advantages it provides include:
- Flexibility
- Liquidity
- Tax Benefits
- Transparency
- Goal-based planning
- Investment + Insurance in a single plan
How does ULIP Work?
ULIP = Investment (mutual funds/equity/debt) + Insurance (Life policy)
- For the investment part, there is an option to choose a plan or switch between plans. Similar to a mutual fund, you are assigned units in proportion to the investment. Each unit has a daily NAV (Net Asset Value), which reflects the value of the underlying assets.
- Professional fund managers are assigned to closely study the market movements and invest the required portion of your premium accordingly. After investing the money, market movements are analyzed and subsequent changes are made.
- After the policy tenure matures, the entire sum gets credited (aggregate of your investments across all funds). However, in case of death of the beneficiary, the nominee will receive the amount, which is higher, either the sum assured or 105% of the premium that he has paid to date.
To clearly understand how ULIP can actually prove to be of immense value to you, let us take an example to grasp is better.
Tina, a young woman purchases a ULIP at the age of 30 for a 30-year tenure. Her premium payments are allocated towards a life cover/ of INR 1 crore. Additionally, she chooses to invest in equity funds through his ULIP.
Scenario 1:
If Tina unfortunately passes away at the age of 45 due to an accident, her family will receive the higher of two amounts – either the death compensation of INR 1 crore or the fund value at the time of her demise. This ensures that family gets the maximum financial support available under the plan.
Scenario 2:
If Tina manages to survive the entire 30-year duration, she will receive the fund value accumulated based on the performance of her chosen equity funds. This money can help Tina fulfil the financial goals related to retirement, house purchase and much more.
Who should buy ULIP?
ULIP plans are market-connected investment opportunities that can be purchased by anyone above the age of 18. They are ideal for people expecting fairly good returns with minimum life cover.
- For individuals seeking long-term investment opportunities
- For individuals who seek diverse funding options
- For individuals who want more benefits with lesser plans
To conclude and summarize, Unit Linked Insurance Plan (ULIPs) is a versatile financial instrument, due to its ability to integrate the insurance and investment component. With its two-sided nature, policyholders can benefit from protection and wealth creation under a single plan. ULIPs one-of-its-kind features such as market-linked returns, flexibility in fund selection, and transparency aid in a micro-level financial planning.
However, to get maximum returns on your investment, it is important to assess and track your plans periodically, to ensure they align with your financial goals. With ULIPs, the investor gets a tailor-made and microscopic solution, a balanced strategy that supports long-term economic growth as well as life cover for the beneficiary.
FAQs based on ULIP:
1) What is the time-period of ULIP?
A ULIP lock-in period is typically for a duration of five years.
2) Is ULIP a viable investment option?
Unit Linked Insurance Plan is ideal for investors seeking insurance coverage and market-linked returns. However, the suitability of this investment instrument depends upon your financial goals and risk tolerance.
3) Is ULIP covered until tax-exemption in ITR?
Yes, a Unit linked plan is exempted from tax under Section 10(10D) of the Income Tax Act, 1961. This makes it a highly tax-efficient and good saving investment option.