Features and Benefits of Investing in ULIP

Are you wondering what a ULIP is and why people invest in them? 

ULIP stands for Unit Linked Insurance Plan. First introduced in 1971 by the Unit Trust of India, ULIP offers a combination of investment and insurance in one plan. In this plan, you can pay your premiums monthly, quarterly, half-yearly, or yearly. ULIPs make it possible for you to accumulate wealth for your long-term goals, including your dream home, your child's higher education, your retirement, and more. In addition, it guarantees that your family is protected financially, even in the event of an unexpected circumstance through a life cover.

This amalgamation of investment and insurance places ULIPs in a unique position, making them suitable for various investors and capable of fulfilling various life goals. Many investors were initially apprehensive about investing in ULIPs due to the high fees connected with this insurance-investment product. However, in recent years major life insurance providers such as Edelweiss Tokio Life Insurance have launched new-age ULIP products with low fees and a plethora of features to ensure maximum profits and comprehensive insurance coverage for you.

In this article, we will go over the main features of ULIPs and their benefits. But before we start that discussion, let us briefly understand how ULIPs work.

The Working of ULIPs

One portion of the paid premium in unit-linked insurance plans ensures your life cover. And, the other portion of the premium is invested in various fund alternatives, including equity funds, debt funds, and even a combination of the two. You can choose the type of funds you want to invest in when you buy your Unit Linked Insurance Plan. In the event of your untimely demise, your beneficiaries will get the death benefit and/or the fund value, whichever is greater, depending on the kind of unit-linked insurance plan you opt for. If you survive the policy term, you will receive a payout of the fund value as the maturity benefit.

The insurance company will issue 'Units' based on your investment in the market. Each unit is assigned a NAV (Net Asset Value), which is the asset value per unit minus the liability values of an investment fund. NAV is assessed and declared regularly.

Here's an example to help you understand how these plans work:

Lakhan, a 30-year-old male, invests in a 20-year unit-linked insurance plan with a yearly premium of ₹ 60,000. Let's assume the following policy details:

• The initial sum assured is ₹ 6,00,000 (yearly premium x 10)
• ₹ 3500 for annual administration and other costs
• ₹ 56,500 = Total Annual Investment
• Initial NAV = Rs. 10
• Total units = (56500/10) = 5,650

Based on these, the death benefit paid out to Lakhan's nominees in case of his unfortunate demise will be ₹6 lacs or the fund value, whichever is higher. On the other hand, if Lakhan survives the policy term, the maturity benefit will be the fund value accumulated over the policy term, the returns on which will be based on market performance.

Now that we are familiar with the workings of a ULIP plan let us look at the main features of these plans. 

Main Features of ULIPs

ULIPs, or Unit Linked Insurance Plans, have many similarities to other life insurance policies, namely the presence of a sum assured, the ability to add riders,  with flexible policy term and premium payments. Furthermore, there are several distinguishing qualities that set them apart from other types of life insurance.

The following are the critical elements of Unit Linked Insurance Plans:

• Market-linked Returns: ULIP plans offer the chance to earn market-linked returns. The premium paid in a ULIP plan is invested in funds that, in turn, invest in various market instruments, such as debt and equity, in varying proportions. The returns from these investments are based on market performance, and different fund options have varying degrees of risk and potential returns.   
• Fund Switching: A Unit Linked plan's fund-switching function allows policyholders to adjust their returns by moving money from one market-linked fund to another within the same plan. Policyholders can select funds based on their financial objectives and risk tolerance capacity.
• Lock-in period for ULIP: Unit Linked Insurance Plans, unlike standard investment plans, have a 5-year lock-in term. During this time, you are not allowed to make any withdrawals from your investment. Even if you decide to cancel/surrender your policy during the lock-in period, the fund value will be paid out to you after five years, while your insurance coverage will expire immediately.
• Partial Withdrawals: Traditional life insurance policies usually don't allow you to avail any benefits until the policy term expires. However, a partial withdrawal feature in Unit Linked Insurance Plans enables you to meet any liquidity needs even during the policy's duration. However, this function is only available after a five-year lock-in period, after which you can withdraw a portion of your savings as needed under the policy terms.
• Charges for ULIPs: Your investment is subject to some additional ULIP charges. However, you need not be concerned about these ULIP charges impacting your fund performance, as IRDAI has capped them. Mortality charges, discontinuation charges, fund management charges, fund switching fees, and partial withdrawal charges are some of the common ULIP charges, however these may vary from one insurance provider to another.   
• Top-up Premiums: The top-up function in ULIPs allows you to raise the amount you invest in your policy each year, allowing you to keep up with your expanding life goals. As a result, you can put more money into the market-linked funds of your choice. This may boost your chances of earning greater long-term returns to accomplish your life goals. In addition, you can use the top-up feature to update your investments if you receive an unexpected windfall or a salary raise.

Benefits of Investing in ULIPs

While the features of ULIPs make them investor friendly, the best ULIP plan provides various benefits. Some of the essential ones are discussed in detail below:

• Market-linked Returns: ULIP plans offer the chance to earn market-linked returns. A portion of the premium paid in a ULIP plan is invested in funds that invest in various market instruments, such as debt and equity, in varying proportions.
• Tax Benefits: In addition to insurance and investment benefits, Unit Linked Insurance Plans provide income tax exemption benefits up to ₹ 1.5 lacs per section 80(80C) of the Income Tax Act. Furthermore, the maturity benefits on ULIPs are tax-free under Section 10D.
• Profits as you Desire: Depending upon the kind of fund you are investing in you can generate good returns from a ULIP investment. For instance, if you invest in an Equity Fund, they are often riskier than other ULIP funds, but they also have the potential for higher returns. Similarly, Hybrid or Balanced Funds invest in equity and debt to provide healthy returns without taking on many risks.
• Flexibility to Switch Between Funds: ULIPs offer you the flexibility to switch from one fund type to another, to maneuver your funds as per market conditions and fund performance. You can profit from fund/market fluctuations by switching between equities, debt, and cash.

Conclusion - Are ULIPs right for you?

ULIPs are a popular investment choice for investors with varying risk appetites and people across different life stages. Equity-oriented funds are suitable for investors wanting significantly better returns and willing to accept a higher level of risk. On the other hand, risk-averse investors may prefer debt funds, which provide greater stability than equity funds. Investors can also choose to split their investments between equity and debt funds based on their risk tolerance. ULIP plans, with their diverse fund selection, fundamentally serve persons with variable risk tolerance.

People at different phases of life have varied demands, and ULIPs can be tailored to meet them all. It makes no difference if you are 20, 35, or 50. Whatever your age, you are bound to have some life goals and objectives that you aspire to achieve. For example, you could wish to finish your MBA or put a down payment on your dream home. Whatever the cause, a corpus is required to fund your life ambitions. You can utilize a Unit Linked Insurance Plan, or ULIP, to assist you in saving the funds needed to attain your Life Goals.

You can choose the new-age ULIPs offered by Edelweiss Tokio Life Insurance to enhance your portfolio. They are affordable and allow you to choose from a diverse pool of funds. Features like systematic partial withdrawals and loyalty additions make them suitable for those looking to create a long-term corpus for retirement or their children's future. Check out ULIPs and find a suitable plan for yourself today!

 

Chirag Iyer - BFSI Enthusiast

Chirag is a writer and an avid reader who loves to drink coffee! His other interests include boxing, karate, and singing.