What are the Limitations of Investment in ULIP in India?

A Unit-Linked Insurance Plan (ULIP) offers two benefits in a single product: insurance and investment. Simply put, your premium for a ULIP is divided into two parts. The first provides life cover, and the other is invested in money market instruments such as debt funds and the stock market.

In this article, we will discuss the investment limitations in ULIPs and other essential details that you should be aware of before investing.

There is no specific number for this. The minimum and maximum amount you can invest in ULIP depends on your requirements and the company or the provider.

The minimum investment in ULIP can be as low as Rs 1000 per month, depending on the company. Many companies offer different payment options like monthly, annually, etc., while some other companies offer their customer to make a single premium payment.

Generally, there is no cap on the premium amount for maximum investment. It can be any amount depending on how much you can pay as per your financial goals.

Also Read: What Is the Aim of Long-Term Budget Planning?

1. Absolute Returns

An absolute return on a ULIP investment is the increase in the value of the invested amount over time. It can be both negative and positive.

If you want to calculate the absolute returns value of a ULIP scheme, you need its current NAV and initial NAV, where NAV stands for Net Asset Value. Following is the formula for calculating the same:

[(Current NAV – Initial NAV)/Initial NAV] × 100

For instance, if your current ULIP NAV is Rs.500 and the initial NAV is Rs.400, the absolute return will be 25% in a year.

Also Read: What is Sum Assured in ULIP

2. Compounded Annual Growth Rate (CAGR)

Compounded Annual Growth Rate or CAGR is the sum of the investment's yearly growth. A formula for calculating CAGR requires the ULIP scheme's beginning value, current value, and the number of years invested. The formula is as follows:

{[(Current Value of NAV/Beginning Value of NAV) ^ (1/Number of Years)] – 1} x 100

For a better understanding, consider the beginning value of this scheme to be Rs.600 and the current value to be Rs 700 after five years of investment. Hence, the CAGR in this scheme will be 3.13%.

Though it helps to grow your wealth long-term, this investment has some limitations. Some of its drawbacks are:

• Lock-in Period: You cannot withdraw your money during the 5-year lock-in period. Even if you cancel the scheme, you must wait until the lock-in period ends to withdraw your invested capital.
• Costs: ULIPs have a high cost attached to them, so a large portion of your premium is first lost to cover these costs.
• Fund Switching Charges: Policyholders can switch funds for free, but these attract charges after a few switches.
• Not Ideal for Short-term Investment: This type of investment is usually long-term due to the lock-in period. Also, because of market fluctuations, ULIPs are not ideal for short-term investment.
• Complexity: ULIPs may seem difficult to individuals just beginning their investment journey because they involve insurance and investment. Additionally, you must constantly follow the money market and decide where to move or which fund to switch to.

1. Dual Benefits Under a Single Scheme

You will not need to buy investment and insurance policies separately, as ULIP is the only financial scheme in India which provides both in one go.

It provides investment opportunities while simultaneously offering life insurance coverage. This can save you a lot of money and help you reach your financial goals.

2. Flexible Investment Opportunities

ULIP allows you to switch your investment between debt and equity funds.

Depending on market fluctuations, you can increase or decrease your asset allocation in these investment instruments. This benefit lets you optimise your ULIP returns and align your financial goals with market trends.

3. Tax Benefits

ULIP investments are eligible for tax deductions as per Section 80C of the Income Tax Act, 1961. The amount you get at the time of maturity of your ULIP policy is also free from tax according to Section 10D of the Income Tax Act, 1961.

Additionally, the amount received by the nominee if the policyholder passes away is also exempt from tax under Section 10 (10D) of the Income Tax Act, 1961.

4. Possibilities of Higher Returns of Investment

The potential to get maximum returns is higher in ULIP schemes than in other investment instruments.

These higher return potentials are possible because of the flexibility offered between the investment funds. Additionally, insurance companies provide various offers and bonuses for existing customers as rewards for loyalty.

5. Long-Term Benefits

6. Goal-Based Planning

7. Freedom to Choose Your Life Cover

You will have the flexibility to choose the amount of your life insurance coverage. This has a big advantage, as it allows you to have good financial protection along with a stable investment plan, such as equity or debt funds.

Also Read: What is Free Look Period in ULIP?

Starting your investment in ULIPs at an early age can be highly beneficial. The growth potential of ULIPs largely depends on the chosen funds, and with a typical lock-in period of up to five years, your investment has ample time to appreciate in value.

Extending your investment beyond the initial five years can further enhance returns, providing more significant growth opportunities.

ULIPs are widely favoured as financial products due to their numerous benefits. Many investors are drawn to ULIPs for their high return potential and tax benefits. These advantages, coupled with the diverse features of ULIP plans, make them an attractive investment option.

Additional Things to Know about Investments in ULIP

Here are a few additional things you should know before making investments in ULIP plans:

• Factors like the plan’s performance, return potential, and tax treatment contribute to its popularity. Therefore, if you're considering investing in ULIPs, there are compelling reasons to do so now.
• Moreover, ULIPs, life insurance products, offer the advantage of lower premiums when you start at a younger age. An early start not only ensures a longer investment horizon but also allows more time for your money to grow. Hence, it's advisable to immediately invest in ULIPs as soon as possible for optimal benefits.
• Although ULIPs have investment limitations, they can be quite beneficial and help you reach your financial goals. ULIPs are ideal if you plan on investing in securities that offer a variety of rewards all under one roof. If you invest strategically, you can avoid the disadvantages and reap many benefits.