Unit Linked Investment Plan(ULIP)
United Linked Insurance Plan abbreviated as ULIP is one of the most popular investment vehicles available today. Several people usually prefer it as it offers the dual benefit of insurance and investment.
What is ULIP?
Unit Linked Investment Plan (ULIP) is a combination of insurance and investment. In this plan, people can make a monthly or an annual premium. One part of the premium goes towards life insurance, and the other part goes into investment. The investment is made in equities or debts based on the policy buyer’s choice.
The investments made under this plan are subject to market risks. The policyholder bears the responsibility for the investment risk, as it’s made based on his decision. Hence, the policy buyers should choose the investment portfolio based on their risk appetite.
The charges associated with the plan such as fund management charges, allocation charges, etc., are mentioned during policy issuance. ULIP plans also offer the choice for the investors to switch from equity to debt and vice-versa. ULIP plans are popular because of their potential to give maximum returns and comprehensive insurance protection cover for the investor.
How do ULIPs work?
In the Unit-Linked insurance plan, a portion of your investment goes into insurance, and the balance goes into funds. The buyer can choose the fund options based on his financial capability, investment goals, and risk appetite. In the event of an unfortunate demise of the policyholder within the policy period, then his nominees would receive the life insurance cover, and/or fund value, whichever is higher based on the plan type.
The companies would give fund units to the policyholder, similar to mutual funds based on his/her proportion of the investment. The policyholder’s units represent his investments and are allocated a NAV, which varies daily.
Benefits of ULIPs
Listed below are the benefits of buying a ULIP,
Savings, insurance, and investment
ULIPs serve a trifecta of purposes with savings, insurance, and investment. Investing in ULIPs helps you develop saving habits, especially with a focus on generating long term wealth. Since ULIPs come with the dual benefit of insurance and investment, you can avoid paying for them separately.
Income Tax Benefits
The premium paid towards a ULIP plan is eligible for tax deduction under Section 80C of the Income Tax Act. Moreover, the returns upon maturity qualify for tax exemption under Section 10(10D) of the Income-tax Act.
Long term finance goals
If you have a long term goal like buying your dream house, starting your own business, finance for your child's higher education, then ULIP is a great investment option. As the money gets compounded, the returns are higher. It is true even if you want to exit the plan after the lock-in period, as the returns are higher than what you can earn in savings or a bank fixed deposit. Generally, it is advised to retain the policy till the completion of its tenure to reap its full benefit.
Some ULIP plans come with a flexible option to switch your portfolio between debt and equity funds based on your risk appetite. You can analyze the market situation and convert it accordingly.
How to Choose ULIP?
A potential buyer should analyze several factors before choosing a ULIP Plan. Mentioned below are a few pointers which would help you to choose the best ULIP Plan.