What are the Pros & Cons of Investing in ULIP?

A Unit Linked Insurance Plan or ULIP is a profitable option for individuals looking for insurance with an investment component. However, it is associated with both pros and cons that are essential to understand before investing.

Keep reading to figure out if this plan is beneficial for you. Additionally, you can also know why to invest in ULIP to be sure that you are making the right decision.

The advantages of investing in ULIP are as follows:

• Flexibility of Changing Life Cover: Just like in other life insurance options, you can increase or decrease the premium of your policy as per your convenience. This allows you to get optimum coverage as per your future goals.
• Availability of Premium Redirection: You have the option of changing the fund type for your future investments to maximise your returns. However, you cannot do so for the premiums that you have already invested up to that point.
• Dual Benefits in One Package: You can enjoy the benefits of both insurance and investments with a single policy. Also, you will have to pay only one premium, which is comparatively easier to manage.
• Flexibility of Changing Life Cover: You can increase or decrease the premium of your policy as per your convenience. This allows you to get optimum coverage as per your future goals.
• Tax-free Payouts: Your nominee will not have to pay taxes on the sum assured as per Section 10D of the Income Tax Act. This can lead to substantial savings that you can invest elsewhere.

However, there are also some cons that you must know before going forward with investing in ULIP. These are as follows:

• Expensive Premiums: The premiums are expensive compared to term insurance as it is used for both investment and insurance.
• Constant Market Fluctuations: The financial markets fluctuate considerably. Hence if you choose to invest in ULIP, then there is always a chance of losses when the price of shares decreases.
• Lock-In Period: The minimum lock-in period for this type of policy is five years. So if you withdraw money from your investment, you will have to pay additional charges. 
• Chargeable Switches: Most insurers provide only a fixed number of free switches to their customers. Beyond this, if you want to switch funds, you might have to pay additional charges. 
• Higher Initial Investment: The initial cost of the premium is higher compared to the later ones. This is so because the initial payments are directed towards policy premiums. 
• Complex Investments: This policy might seem a bit complex for first-time buyers. It is so because you will have to keep track of both investments and policy premiums simultaneously. However, there are several reasons why you should invest in ULIPs.

Below are some compelling reasons why you should consider investing in ULIP:

• Flexibility in Investment Option: You have the flexibility to invest in the fund type that you find the most suitable for you. There are three types of funds available in ULIP. These include equity funds, debt funds and balanced funds. Each of them varies in returns, risks, fund potential, and volatility. So you must study them properly before investing.
• Availability of Tax Exemptions: Tax exemptions are available at different stages of your ULIP. These include:
• Entry Advantage: You can avail tax benefits under Section 80C and 80D on your premiums. 
• Switching Advantage: You can opt for tax-free switches between debt funds and equity funds as per your convenience. 
• Exit advantage: You do not have to pay any tax on your claim amount under Section 10D of the Income Tax Act.
• Withdrawal Facility During Lock-In Period: In case of ULIPs, you have the facility to withdraw some amount from your investment during your lock-in period. Nonetheless, you might have to pay some additional charges or face some deductions for the same.
• Sumptuous Return Potentials: There are several fund types in ULIP where you can invest for sumptuous returns. This mainly includes the equity fund and, to some extent, the balanced fund. However, you can also switch between equity funds and debt funds as per market fluctuations to maximise your returns while avoiding volatility. Also, you can invest in funds with higher return potential to earn more.
• Availability of Death Benefits: Your nominee can get the sum assured in case of your untimely demise. This money is free of tax, and hence they can get the total sum assured amount on raising a claim. It provides financial protection to your family in your absence. 
• Long-Term Growth Benefits: If you invest in ULIP for a long time, you can expect sumptuous returns from it. This is so because your investment keeps compounding with time, in turn increasing your returns. Also, your insurer can reward you with additional points for investing over a longer time.
• Availability of Top-Up Option: You can easily increase your investment by topping it up anytime you want. This will substantially increase your returns.

Below are some things that you need to keep in mind before investing in ULIP:

• Select the right premium: You must choose an optimum premium that is not hard on your pocket and yet not too little to achieve your objectives.
• Check solvency of insurer: It is essential to check the solvency ratio of the insurer to be sure about receiving the claim amount on time.
• Evaluate additional charges: You must calculate the additional charges associated with the premium to estimate your total costs.
• Determine the risk potential of funds: You must evaluate the risk potential of the funds in which you are investing.
• Compare premiums thoroughly: It is essential to thoroughly compare ULIPs available in the market to invest in the most affordable one. 

Now that you know why to invest in ULIP along with its pros and cons, you can gauge if it is essential to achieve your financial goal. If you find it useful, you can proceed to invest according to your needs and goals.