‘Wealth creation’ is no longer a thing of the bygone era. In earlier days, people used to invest in gold, farm lands and real estate, but now, with the rising inflation and greater awareness, people look for investment instrument products and other similar avenues to invest in.
One such long term wealth creation wonder would be ULIPs. Read on to learn more about simple things and key features of ULIPs.
- How do ULIPs work?
Unit Linked Investment Plans or ULIP, unlike a pure insurance policy, go into investing partly as a mortality cover for the investor and partly into market linked investments, based on the needs and the risk appetite of the investor. What sets them apart from the traditional insurance policies is their ability to produce an investment cum insurance hybrid.
2) Key features of ULIPs
- a) Life cover
In case of an untimely death, the nominee of the insured is eligible to receive a death benefit. The death benefit can be either higher of the sum assured or the fund value or both depending on the type of ULIP plan.
- b) Tax benefits under Section 80C
Premiums that are paid towards the plan up to Rs.1.5 lakh are eligible for tax deductions under the Section 80(C).
The sum assured which is paid to the nominee on maturity and death is also tax free under Section 10 (10D)
- c) Add top-up to the base plan
Top-ups may be defined as a lump sum investment to be paid over and above premiums. It is an optional feature of ULIPs and can be availed anytime. ULIPS can provide one with the opportunity to increase the base plan coverage along with the investment fund through Top-ups.
3) Costs involved in ULIP – Charges
Investments in ULIP involve expenses, viz.:
- Premium allocation charge – anywhere between 0-1.35%
- Administration charge which is deducted on a monthly basis
- Mortality charge which varies with the age bracket
- Fund management charge – anywhere between 0.5-2%
- Surrender charge – ULIPs can be surrendered prematurely, but on account of cost implications. If a ULIP is surrendered in the first five years, the insurance cover would cease immediately. However, the surrender value can be paid only after five years. So though the policy acquires a surrender value before completion of five years, it is payable only after the completion of five policy years.
Insurance companies allow partial withdrawal after five years without any cost and without any reduction in the insurance coverage.
4) Tax Benefits
The premiums that are paid by the insured are eligible for tax benefits under Section 80C wherein a deduction of up to INR 1.5 lakh from the taxable income of the insured is permitted. Along with this post the death of the policyholder, the amount received by the nominee would be tax-free. Even the maturity, which is classified as pay-out, under section 10 (10D) is tax free for the policyholder.
One unique feature of the ULIPs is that it permits switching between investment options to match your changing needs, without a tax liability. There lies a facility to partially withdraw from one’s own funds, which is but of course subject to charges and conditions. This makes ULIPs stand out from the other market-linked investment propositions.
6) Loyalty additions are provided after a restricted time-frame
Loyalty additions provided under ULIP plan also helps in growing the investment and creating a larger wealth corpus. Some provide a marginal addition after the third year only, whereas other provide it after 5 or 10 years. Amount of Loyalty additions vary for each ULIP.
7) How To Make the Most of your ULIPs
- Think for the long term: Since ULIP is structured in a way to provide benefit in the long run, one is bound to receive the additional benefits if one treats like planting a tree and waits for results to yield after a longer time.
- Know what you’re aiming for: Your prime focus should be on insuring your family on account of any unprecedented events. You should sit down and work out the required life cover based on your current age bracket, income and the number of dependants.
- Riders: A rider in a ULIP is an additional cover alongside base policy for an extra charge. It could be accidental death, disability benefit or a critical illness cover.
- Top ups: The investment component can be increased in the base policy for an additional amount over the regular premium.
- Switches: You could risk switching your investments from one fund to another in case of a change in your risk profile depending on your age, objective for investment and time duration.
Types of ULIP investments
There are four types of ULIP investments, viz;
- Equity funds: They are one of the risky ULIP investments but which also provide the highest returns. They operate over the principle of high risk and high rewards.
- Balanced funds: The safest and most modest investments intended towards investors looking for safety, income and a decent capital appreciation. They pose a relatively lower risk to the investor. They pose medium risk but give out higher returns.
- Income, fix-interest and bond funds: Under these ULIPs, your funds will be invested in government securities, fixed-income securities, bonds etc. which pose medium risk and thence give out medium rewards.
- Cash funds: Investments in such ULIPs directs into money market, cash and other money market instruments and pose low risk and therefore a low reward as well.
ULIPs have their own advantages and disadvantages, although the former trumps the latter in a huge way. By keeping the above points in mind, you could buy your very own ULIP and draw out the desirable results from them. So, what are you waiting for? Go get your appropriate ULIP plan today!