ULIP is a life insurance product, which provides risk cover for the policy holder along with investment options to invest in any number of qualified investments such as stocks, bonds or mutual funds. In simple words ULIP is a combination of insurance and investment. Here policyholder can pay a premium monthly or annually. A small amount of the premium goes to secure life insurance and rest of the money is invested just like a mutual fund does.
How It Works?
The premium amount is divided into two parts. Part of the premium is kept exclusively for buying the life insurance cover while the remaining part is used for investment.
Who can seek ULIP?
Anybody who meets the criteria for minimum and maximum age as per the rules of the policy. Anybody who can make the premium payments on time as per the rules and regulations.
Why you should buy ULIPs?
Being an investment-cum-insurance policy, ULIP is among the most productive option to choose for investment. In this plan, the sum of your money is invested across stuck markets. Which generates considerable returns and provides you with the coverage for any risk as long as the policy remains in force?
A ULIP provides investors with a number of advantages.
- Flexible:ULIPs offer investors the option of switching between funds, resulting in better choices to the investor. Investors can choose to invest in either debt or equity funds depending on their risk appetite and market conditions.
- Risk appetite: ULIPs offer investors to pick choose their investments based on their risk appetite. Low risk appetite investors can choose to invest in debt funds and those who are willing to take a higher risk can opt for equity funds.
- Tax benefits:With ULIPs being life insurance products, they offer tax benefits in the form of tax free maturity. However this tax benefit depends on the type of ULIP invested, as equity funds could be taxed 15% under certain conditions.
- Low charges: ULIPs do not have high charges associated with them. IRDA has capped the annual charge on ULIPs at 2-2.25% p.a. for the initial 10 years, with the charges on par with those of mutual funds.
- Long term investment: ULIPs are a long term investment option due to the increased lock-in period which also reaps bigger returns.
- Premium Allocation Charges– The charges, namely premium allocation charges are imposed beforehand on the premium paid by the investor. There are the initial expenses incurred by a company in issuing the policy, like medical expenses and underwriting cost.
- Policy Administrative Charges– These charges are deducted regularly for the recovery of expenses borne by the insurance company for maintaining life insurance policy.
- Discontinuance Charges– On premature discontinuation of a plan within lock in period, the insurer deducts a small fee. Since these charges are present by IRDA, these are the same for almost all policies.
- Fund Switching Charge– ULIP plans enable you to invest your hard-earned money in different fund options that further have multiple debts equity exposure as well as provide you with the option to switch between different funds for which your insurance company will charge the switching fee. Most of the policies provide fee free switches every year.
- Surrender charges– These charges refer to the deduction for full or partial encashment of premature unit’s subjects to the policy documents. These charges are levied as a percentage of the fund value or as a percentage of the premium.
- Fund Management Charges– The aggregated sum through ULIP funds is invested in equity instruments and debt. The insurer bears these charges for fund management, which vary with both fund and plan.
- Mortality Charges– The expenses, namely mortality charges are borne by the insurer to provide a life cover to insured, which vary with age and sum assured of the policy. These charges are deducted on a monthly basis.
What type of funds Do ULIP Offers?
- Cash funds:cash funds, also known as money market funds, are mutual funds that provide a safe and easily accessible avenue to invest. These funds are generally low-risk, low return funds.
- Balanced funds:balanced funds combine equity and fixed interest instruments. By virtue of the fixed interest component, the funds combine safety with capital appreciation (through the equity fund component). These funds maintain a balance of stock and bond options, resulting in guaranteed returns, with the bonds offsetting the potential risks of equity investments. These funds are categorised as medium-risk.
- Income, fixed interest and bond funds:these funds are generally invested in corporate bonds, debt funds, government securities and allied fixed income instruments. With their mix of secured and unsecured investments, these funds provide policyholders with a moderate percentage in terms of returns and have an elevated risk factor.
- Equity funds:equity funds are invested in company stocks. The aim of equities is to generate capital appreciation, making these high-risk investments.