What is Unit Linked Insurance Plan? How to invest in ULIPs? Top 5 ULIP plans in India
What is Unit Linked Insurance Plan?
Benefits of ULIPs: Unit Linked Insurance Plan (ULIP) is a product that offers the double benefit of an insurance cover and investment under a single plan. It’s an innovative product like Systematic investment plan (SIP). It provides flexible option to invest in any number of market instruments like stocks, mutual funds, bonds etc. It provides opportunity to earn market-linked funds which invest in various market instruments like the above. Unlike a SIP which gives only fixed returns, Unit Linked Insurance Plan (ULIP) earns you higher returns since your investment is market-linked.
Unit Linked Insurance Plan (ULIP) also allows flexibility to choose between various investment funds based on your needs and risk appetite. For example, a 80-20 combination of Equity-bond or 50-50 combination of Equity-bond. There is also a provision to partially withdraw from your fund. Unit Linked Insurance Plan (ULIP) is an ideal long term investment. It is also a low-cost option and therefore fits your pocket well. An Indian Financial Guru recently remarked that ULIPs are transforming Indians from Savers to investors.
How Unit Linked Investment Plans (ULIP) work?
The policy holder can either choose to pay the entire premium at the beginning of the policy term. Alternatively, he/she can choose to pay the premium on a monthly or annual basis also. Different policies offer different policy terms. You can get the maximum out of ULIPs if you invest for the long term.
When you invest in ULIPs, a certain premium amount is allocated towards life insurance. The rest of the premium is invested in market funds like Bonds, equity etc. You will receive the fund value at the end of the maturity period. Low-cost ULIPs are most suitable for small investors. Let me illustrate working of ULIPs with an example. For example, you buy a ULIP with an annual premium of Rs. 50000 for 20 years. The plan will give you an insurance cover of Rs. 5 lakh (10 times the annual premium). After deducting charges, say Rs 5000 the remaining amount i.e Rs. 45000 will be invested in a fund. If the fund has a NAV (Net Asset Value) of Rs 10, you will get 4500 units. If the NAV increases, your fund value also increases. After a year, if the NAV becomes Rs. 12, your fund value will become Rs. 54000(Rs 45000 * 12)
The maturity proceeds from ULIPs are tax-free. After a certain period of time, almost all ULIPs provide you the option of changing the premium amount.
Based on your risk appetite and reading of the market, you can shift your money in your ULIP from equity to debt or vice –versa. This is a big flexibility offered by ULIPs.
Companies may levy charges like Premium allocation charge, Administration charge, mortality charge etc. Mortality charges are levied towards life insurance cover. The charge levied will come down as you make each premium payment
Tax benefits: ULIPs offer tax exemption benefits under 80c and 80D of Income tax act. A maximum of Rs 1,50,000 is allowed under section 80C/ 80CCC.
ULIPs also offer tax benefits on maturity. Under section 10(10D), the maturity proceeds from a life insurance policy will be tax free if the sum assured is 10 times the single premium paid. In other words, if the premium payable for the sum assured does not exceed 10%, the amount received on partial withdrawal or maturity is exempt from tax.
For whom ULIPs could be a disadvantage?
If you want a safe investment option with fixed returns, ULIPs are not the right investment option for you. Systematic investment plans (SIPs) will be a better investment option in such a case because they will shield you from market fluctuations and give you fixed returns. However, if you are willing to take risks and also want to have a share in the profit whenever there is a boom or bullish trend in the market, then you and ULIPs are made for each other.
What are the popular ULIPs in India?
Some of the popular ULIPs are
- SBI life ULIP plan
- HDFC Life ULIP plan
- ICICI pru Life
- Bajaj Allianz
- Bajaj Fortune
- ICICI Wealth builder
- LIC Endowment plus
Read the offer document carefully before investing. Happy investing