In India, many people prefer buying ULIP (Unit-Linked Insurance Plan) over other life insurance products in the market for two reasons. One, ULIP is highly tax-efficient; it enjoys EEE (exempt-exempt-exempt) tax status. Two, it offers dual benefits of wealth creation and life cover in a single policy.
ULIP is primarily a life insurance product that allows you to invest in different assets of your choice and get market-linked returns. You can choose to invest any funds based on your risk appetite and the long-term financial goals you want to accomplish.
If you are an amateur investor or a first-time insurance buyer, you must know how the ULIP plan works and its features to make an informed buying decision.
How do ULIP plans work?
As mentioned earlier, ULIP is a hybrid financial product that combines the benefits of insurance and investment.
When you buy ULIP, one part of the premium is used for providing life protection. The other half is invested in the money market. As per your specific needs, you can choose to invest in different assets such as stocks, bonds, debt, equity, and hybrid funds. You can even allocate a specific portion of the money to be invested in different asset classes.
The insurance companies give you the flexibility to choose the policy’s sum assured, policy tenure and the premium payment mode. You can choose to pay the premium monthly, quarterly, half-yearly or once a year.
Like mutual funds, the insurance company creates a pool of money collected from different investors and invests in various financial instruments to generate returns for all.
When you invest your money in ULIP, the insurance allocates units of funds at the NAV (Net Asset Value).
You will receive the maturity benefits at the end of the policy term as per the policy terms and conditions.
Like a standalone life insurance policy, in the event of your demise during the policy period, the insurance company will pay the sum assured to your nominee.
Features of ULIP
ULIPs allow you to switch your investment in one fund to another as per your changing goals and fluctuations in the market. Generally, insurance companies allow a specific number of free switches in a year, and if you exceed that count, you may have to pay fund switching charges. The fund switching feature lets you take advantage of the market condition and maximise your returns potential.
Unlike traditional life insurance policies, ULIPs allow you to partially withdraw funds after completing a five-year lock-in period. Some ULIP plans may have limitations on the number of times you can withdraw in a year and the amount you can withdraw.
Another significant feature of ULIP that deserves special mention is the top-up facility. If you have surplus cash in hand, you can use the top-up feature to increase your investments in ULIP and get higher returns. Top-ups are essentially the additional premium you pay for the ULIP.
ULIPs are subject to different charges. Since fund managers manage the investments, the insurance companies levy fund management charges. Other expenses associated with ULIPs include partial withdrawal fees, premium allocation charges, mortality charges, etc.
ULIP is an excellent investment instrument that allows you to build a corpus for the future and accomplish your goals while ensuring the financial safety of your family members. Now that you are aware of the features and working of ULIP, do your due diligence and make the most out of your investment.