Back in the day, people were aware of only traditional life insurance products, such as whole life or endowment plans. With time, the insurance industry also launched new products, considering the needs of consumers. These new products dominate the current market with their unique strategies. One such product that has gained popularity over the recent years is a Unit Linked Insurance Plan (ULIP).
ULIP is a financial product that is preferred by individuals because of its unique composition and flexibility. It is a single plan that offers both life insurance and an investment opportunity. When you buy a ULIP, like any other life insurance, you are required to pay premiums. The premiums you pay for your ULIP are partially used towards providing you with a life cover and partially invested in the funds of your choice. The life insurance component here ensures that, in case you suddenly lose your life during the policy duration, your dependents will have a financial cover to rely on. While the investment component enables you to fulfil your long-term financial goals.
Since what a ULIP plan does is more than just providing life insurance, policyholders may have several things they may not know about a ULIP. This includes tax benefits, the funds invested, the risk involved, and the duration of the investment. It is important to know certain aspects of a ULIP before buying one.
Aspects of a ULIP you may not know about
ULIP is a distinctive type of life insurance and differs from other types in several aspects. Here are some common factors of a ULIP that you may be unaware of:
- Offers several types of investment
When you are planning to invest your money in any funds, one of the first things to check is the risk associated with it. ULIP benefits every policyholder by offering them different types of investment to choose from based on their risk appetite. One can allocate their funds to equity markets if they will take risk or debt markets, if they are risk-averse. Also, investors have the choice to opt for balanced funds that offer a blend of equity and debt. This ensures that, with moderate risk, the investor earns moderate returns. There are also some insurance companies that offer goal-based ULIP funds.
- Tax benefits
A ULIP is designed in such a manner that it offers tax benefits on multiple levels. When you buy a ULIP, the premiums you pay are exempt from taxes under Section 80C of the Income Tax Act. The sum assured that the nominee receives in case of the demise of the policyholder is also tax-free as per Section 10 (10D) of the Income Tax Act. When your ULIP matures, the investment amount that you receive, along with its returns, is also exempt from taxes, subject to certain conditions.
- Charges associated with the plan
Since you are buying life insurance and investment under one plan, there are several ULIP charges you may come across. Premium allocation charge, fund management charge, mortality charges, policy administration charge, and surrender charge are some common charges associated with the plan. When ULIPs were initially launched, these charges were high, and hence, people avoided buying them. Over the years, to increase the purchase of ULIPs amongst the masses, insurance companies have made these charges minimal. They have even eliminated several of these ULIP charges.
- Flexibility to switch funds
Most investments do not allow you to switch your fund allocation once you have purchased their product. For ULIPs, things work differently. You may switch your fund allocation any time you want. Most insurance companies allow you to switch allocations for free during the policy duration. This means that you can switch from debt to equity and vice versa anytime you want. This remarkable feature of ULIP allows you to make the most of market volatility.
Apart from the factors above, one of the ULIP benefits is that it allows partial withdrawals after the lock-in period. The lock-in period is 5 years, after which one can access partial withdrawals for free. The tax benefits, partial withdrawals, flexibility of fund allocation, along with providing life cover make ULIP a popular financial product.