Investing in ULIPs yields better returns over longer investment periods. Starting investments early proves advantageous, granting ample time for your investment to mature in alignment with your financial objectives.
Unit Linked Insurance Plan: Meaning & Benefits Explained
In a world with innumerable financial possibilities, ULIP emerge as a unique investment option that combine life insurance coverage with investment growth. Designed to cater to your aspirations of wealth building and financial security, a ULIP plan offers a dual benefit that empowers you to protect your loved ones and achieve your investment goals simultaneously.
Let’s discuss ULIP plans, their types, features, benefits, and how to choose the right ULIP plan for yourself.
What are ULIPs?
ULIPs, or Unit Linked Insurance Plans combine the features of life insurance with investment.
Unlike traditional insurance plans, ULIPs offer policyholders the flexibility to choose from a range of investment funds, aligning with their risk tolerance and financial objectives.
These plans allocate a portion of your premium towards life coverage and the remaining towards investments, thus making you financially secure against unforeseen circumstances and at the same time growing your investment.
Types of ULIPs
A. Based On Purpose
1. ULIP for Retirement
Whole Life ULIPs are specially crafted to be a retirement planning investment. They offer a combination of insurance and investment, enabling you to build a substantial corpus over time. The accrued wealth can be availed as a lump sum or as regular income post-retirement.
2. ULIP for Wealth Creation
ULIPs, if invested at a young age, can aid in considerable wealth accumulation. They enable young investors to grow their investments over the long term. By capitalizing on market opportunities and compounding over a long period, one can build substantial wealth for various goals like buying a home or starting a business.
3. ULIP for Child Education
The Child ULIPs focus on securing your child's education expenses. They are specifically designed to ensure a financial cushion to fund their educational aspirations, offering peace of mind and a brighter future.
Child ULIPs come with Premium Waiver option which ensures that the policy continues even if the premium payment takes a hit due to death or disability of the policyholder parent, thus safeguarding your child’s future.
B. Based on Death Benefit
1. Type 1
These plans assure that in case of the policyholder's demise, the higher of the fund value or the sum assured is paid out and in case of maturity, the fund value is paid.
These plans are suitable for risk-averse investors who seek stable returns while enjoying potential market-linked gains. They combine insurance coverage with a secure investment strategy, providing a safety net in uncertain market scenarios.
For Example, a policyholder has a Type 1 ULIP for which the sum assured is 40 lacs and the fund value at the time of their unfortunate death is 50 lacs. In this case, the beneficiary would be paid the higher amount i.e., 50 lacs fund value in this case.
2. Type 2
Type 2 provide the policyholder with the sum of fund value and sum assured at death. While on maturity, they provide the fund value.
For Example, a policyholder has a Type 2 ULIP for which the sum assured is 40 lacs and the fund value at the time of their unfortunate death is 50 lacs. In this case, the beneficiary would be paid the sum of fund value and sum assured i.e., 90 lacs.
How does Unit Linked Insurance Plan Work?
ULIPs combine the best of insurance and investment, offering a unique way to secure your future while harnessing the power of the markets.
Here is how a ULIP plan work:
- ULIPs combine insurance and investment features in a single plan. When you pay premiums, a part goes towards life coverage and the rest towards investments.
- ULIPs offer various funds (equity, debt, balanced) for investment based on your risk tolerance. These plans operate by offering the policyholder an opportunity to select investment funds based on their risk appetite - from equity funds for potential high returns to debt funds for stability. Professional fund managers manage and allocate investments across various asset classes for optimal returns.
- ULIPs come with a defined policy term, during which your investment grows. Some ULIPs provide loyalty additions over the policy term. ULIPs also have a lock-in period, which varies based on regulations. After the lock-in period, partial withdrawals are allowed for financial emergencies.
- Your returns depend on market conditions, offering both risk and reward. You can switch funds based on market conditions and your financial goals. They can also be tailored to align with your financial goals and risk appetite. Hence, it’s advisable to monitor your ULIP's performance and adjust as needed.
- At maturity, you receive the fund value, which can be utilized for financial goals. However, if the policyholder passes away during the term, the nominee receives the death benefit based on the type of ULIP plan.
- You also enjoy tax benefits on premiums and maturity proceeds as per the prevailing tax laws.
To better understand the working of ULIP, let's consider the case of Aditya, a 40-year-old man who has invested in a ULIP policy for 20 years. He pays an annual premium of 1,00,000 for 10 years.
Here are the policy details:
- Sum Assured: 10X of premium = ₹ 10,00,000
- Total annual charges: ₹ 5000
- Total annual investment: ₹ 95000
- Initial NAV: ₹10
- Units Purchased: ₹ 95000/10 = 9500
- In case Aditya dies during the policy term, either ₹10,00,000 sum assured or the fund value, whichever is higher would be paid to the nominee.
- In case of survival, when the policy attains maturity, the fund value will be paid to Aditya.
Benefits of ULIP Plan
Investing in ULIPs offers a range of advantages that cater to diverse financial goals:
ULIPs merge insurance coverage and investment growth, thus securing your future while growing your wealth simultaneously.
Enjoy the freedom to switch between funds based on market trends, your investment goals or risk appetite, thus aligning your financial aspirations with the investment. You can also make partial withdrawals or make additional investment through top ups based on your personal financial situations.
ULIPs provide clear insight into fund performance, charges, and investment strategy, enabling informed decisions. The charges of ULIP are regulated by the Insurance Regulatory and Development Authority of India (India) and must be disclosed upfront.
Enjoy deductions under Section 80C for premiums paid and tax-free maturity proceeds under Section 10(10D) as per the prevailing tax laws and limits.
ULIPs facilitate goal-based planning, allowing you to tailor investments to specific milestones, like education, home purchase, or retirement. They are majorly long-term investment products thus utilising on the power of compounding and help to build a significant corpus over time.
Who Should Invest in ULIP?
ULIPs are suitable for individuals seeking both life coverage and growth potential. Whether you're a young professional, a parent, or someone looking to create long-term wealth, ULIPs can align with your financial objectives.
Below are the different classes of investors who should look at investing in ULIPs:
1. Investors Across Various Life StagesWith the appropriate investment strategy, ULIPs are a suitable investment across life stages. Young individuals with a higher risk appetite can look for equity based ULIPs for higher returns over a long tenure and the ones nearing retirement, with lower risk profiles can choose debt or balanced funds.
2. Investors with Medium to Long Investment HorizonBeing market related investments, ULIPs are particularly designed for a longer investment horizon and that is why most of them carry a lock in period of 5 years as per the current regulations.
3. Investors with Varying Risk AppetitesULIPs provide fund options catering to different risk profiles. Conservative investors can opt for debt funds, while those seeking higher returns can invest in equity funds, accommodating varying risk appetites.
Understanding ULIP Funds
ULIPs offer a diverse range of investment opportunities, allowing policyholders to tailor their portfolios according to their risk appetite, investment horizon, financial status and investment goals.
The common types of funds offered by these plans are:
1. Large Cap FundsThese funds primarily invest in well-established companies with a significant market capitalization, primarily the top 100 companies. Thus, suitable for conservative investors with a relatively lower risk appetite and a long-term investment horizon.
2. Mid Cap FundsMid cap funds focus on companies with medium-sized market capitalisation. However, they carry higher risk due to the comparatively smaller size of companies. These funds seek to offer a balance between growth potential and risk, thus tend to offer greater growth potential than large cap funds, but with lesser volatility and risk than small cap stocks. Hence, they appeal to investors seeking higher returns without extreme volatility.
3. Balanced Funds
Also known as hybrid funds, balanced funds combine both equity and debt components. The equity exposure helps in capital appreciation while the debt allocation allows stability and income generation.
These funds seek to strike a balance between risk and stability, making them ideal for those seeking moderate returns with some level of security.
4. Debt Funds
These funds invest in various fixed-income securities like corporate bonds and government securities (G-Secs) that generate interest income or capital gains. They offer relatively stable returns and capital preservation making them less volatile than the other equity exposed funds. Hence, more suited for risk averse investors.
Compared to Fixed Deposits, another stable investment, debt funds potentially offer better returns, daily liquidity, diversification, and professional management. Choosing the right debt fund depends on your risk tolerance and investment horizon.
ULIP vs Mutual Funds - Which Investment is Better?
The answer to the above question depends completely on Investment Objective and Risk Appetite. While insurance is necessary for financially protecting your dependents, investment is important for multiplying wealth for your financial goals.
Let’s see a more detailed comparison of these two investment tools:
|Financial Coverage + Investment
|Investment with varying risk levels as per the risk appetite
|Death Coverage available
|No Death Coverage
|Cannot exceed 2.25% by IRDAI regulation
|Cannot exceed 2.5% by SEBI regulation.
|Lock In Period
|Minimum Lock In Period of 5 years for tax benefits
|No Lock In Period.
Thus, choosing between Mutual Funds and ULIPs depends on how it fits into your investment goal.
A ULIP calculator is a tool that helps investors to assess and plan their investments in ULIPs. It allows them to estimate the expected future value of their investment and insurance coverage based on different parameters such as premium amount, policy term, expected rate of return, and other variables.
As per their need and financial objective, the investors may change the input points and accordingly decide their optimum investment.
Given the non-guaranteed returns of ULIPs, it becomes challenging for investors to decide on the most suited investment plan or amount.
Using a ULIP calculator can assist individuals in understanding how their investment will grow over time. They can check the estimated returns and accordingly decide on a plan that complements their financial goals.
Administration ChargeThis is a fee deducted to manage the administrative expenses of the policy.
Fund Management ChargeIt covers the expenses related to managing the funds and is charged as a percentage of the total fund value.
Switch ChargesULIPs provide the option of switching funds as per your investment goals. These switches attract certain charge known as Switch Charges. However, some insurers might provide a certain number of switches free of cost annually.
Surrender ChargesThese charges are applicable if the policy is surrendered prematurely. They are charged as a certain percentage of the fund value and depend on the policy year in which it has been surrendered.
Mortality ChargesThese charges are levied for providing the death benefit to the policyholder and depend on the policyholder's age and coverage amount.
Premium Allocation ChargesThese are deducted upfront from the premium paid and cover initial administrative and distribution expenses.
Partial Withdrawal ChargesULIPs usually allow partial withdrawals after a certain policy term is over, subject to certain conditions. However, such withdrawals attract charges known as partial withdrawal charges.
What is ULIP Net Asset Value (NAV)?
ULIP NAV, or Net Asset Value, reflects the performance of a Unit Linked Insurance Plan (ULIP). It is the value of a single unit in the ULIP fund at a specific point in time. It is calculated by dividing the total value of the fund's assets by the total number of units issued to policyholders.
The NAV of a ULIP can fluctuate based on the performance of the underlying investment funds, which can include equity, debt, or hybrid funds. It is calculated at the end of each trading day. A higher NAV indicates better fund performance, while a lower NAV implies a lower fund value.
Policyholders can track the NAV of their ULIP to assess its investment performance and make informed decisions about managing their investment portfolio within the ULIP.
How to Choose the Right ULIP Plan?
Selecting the right ULIP requires a thoughtful evaluation of your financial goals, risk tolerance and investment horizon, to help you strike the perfect balance between life protection and wealth creation.
Here are the major points that you must consider while choosing a ULIP plan:
1. Evaluate Your Investment GoalsAs an investor, it is of utmost importance to evaluate your financial objectives like wealth creation, child education or retirement planning and then choose an investment that is aligned with your investment goals.
2. Compare ULIP Plans Across IndustryCompare the ULIP plans offered by different insurers. Evaluate their features, benefits and charges to select the one that suits your needs the best. This helps you maximise the benefits out of your selection.
3. FlexibilityULIPs offer a range of investment options to their investors, depending on their risk appetite and investment goals. Choose a plan that offers flexibility in terms of partial withdrawals, choosing and switching funds, premium payments and additional contributions.
4. Evaluate Your Risk Profile and Financial StabilityEvaluating your personal risk appetite and financial situation is important before selecting a ULIP Plan. At younger age, if the willingness to take risk is on higher sider, one may consider investing in equity and for risk averse investors, the debt funds are a better choice.
5. Solvency Ratio of the InsurerThe solvency ratio of an insurance company is a measure of its financial stability and ability to meet its long-term obligations, especially claims that may arise from policyholders. It is a critical indicator of an insurer's financial health and regulatory compliance.
6. Claim Settlement Ratio of the InsurerClaims Settlement Ratio is the percentage of claims settled by an insurance company against the total claims received by it in a particular financial year. They are, hence, a reflection of the ease of your claim settlement with the insurer.
7. Investment StrategyCreating an investment strategy based on their financial goals helps the investor to reap their investment benefits when needed. Switching funds as needed or investing in goal focussed plans helps to optimise returns. For example Whole Life Ulips focus on creating retirement corpus whereas ULIP Child Plans focus on fulfilling the child investment needs.
FAQs about Unit Linked Insurance Plan
Yes, most ULIPs provide partial withdrawal options after a specific lock-in period.
Yes, ULIPs provide a maturity benefit that includes the fund value at the end of the policy term.
The longer tenure in hand for growing the fund value and the availability of life cover all through the tenure makes ULIPs a good option for retirement planning.
Here are some simple steps that you can follow to maximise your returns:
- Start early.
- Pay premiums on time.
- Take advantage of the strategies offered and invest in various funds.
- Review your investment portfolio regularly and make changes.
- Add top ups to strengthen the investment.
Some of the major factors that one should keep in mind while investing in ULIPs are:
- Premature Surrender conditions
- Fund options
- Features and Benefits
- Limitations and Exclusions
- Lapse and Grace Period conditions
- Other Disclosures
No, as per IRDAI ULIP charges cannot exceed 2.25% of the fund value. In fact, the new age ULIPs come with zero premium allocation and admin charges.
No, market volatility only affects fund value. Life cover is usually 10X the premium paid. In most ULIPs, if the insured passes away during the tenure, the higher of the fund value or life cover is paid as the sum assured.
- This is an informative article provided on 'as is' basis for awareness purpose only and not intended as a professional advice. The content of the article is derived from various open sources across the Internet. Digit Life Insurance is not promoting or recommending any aspect in the article or its correctness. Please verify the information and your requirement before taking any decisions.
- All the figures reflected in the article are for illustrative purposes. The premium for Coverage that one buys depends on various factors including customer requirements, eligibility, age, demography, insurance provider, product, coverage amount, term and other factors
- Tax Benefits, if applicable depend on the Tax Regime opted by the individual and the applicable tax provision. Please consult your Tax consultant before making any decision.