Why Unit Linked Insurance is a smart choice
Unit linked insurance plan or ULIP is a market-linked Insurance product that combines the very best of investments and insurance into one. A ULIP plan is linked to market returns and offers flexibility to invest, both in equity and debt portfolios depending upon your risk profile.
This exciting feature of market linked returns clubbed with insurance makesULIPs the preferred choice of new generation. This is the reason why ULIPs contributed 12.77% of the total Insurance Industry premium during the FY 2015-16.
How Unit Linked Insurance planwork?
The premiums you pay are invested in a fund of your choice after deducting fund management, policy administration and the mortality charges for providing life cover.
The value of each unit of the fund is determined by dividing the total value of the fund's investments by the total number of units.For example - Amit buys ULIP for annual premium of Rs 100,000 for 20 years, the plan giveshim a life cover of Rs 10Lakhs (Life cover should be minimum 10 times of the annual premium as per IRDA guidelines). After charges are deducted, say Rs 4,000, the amount of Rs 96,000 is left (Rs 100,000 – Rs 4000) for investment in thechosen fund. Suppose the fund NAV is Rs 13.00 on the day Amit invested, so he will get 7,384.615 units(Rs 96,000/NAV of Rs 13.00).
Now, say after one year the NAV is Rs 14.00, then his total fund value would increase to Rs 103,384.61 (7,384.615 units x Rs 14.00). Similarly, if the NAV of the fund decreases the total fund value would also decrease.
Salient Features of ULIPs
Choice of funds– Insurance Companies offer a variety of fund while buying an ULIP. You can choose a fund suiting your risk profile. Some of the funds that can be chosen are equity Funds, debt and balanced funds. While equity funds primarily invest in the equity marketsfollowingaggressive investment strategy, debt funds follow a conservative investment strategy and balanced funds takes a middle path by investing both in equities and debt.
Life Cover – You are assured of minimum 10 times life cover on annual premium paid as per IRDA guidelines. In case of death, higher of the sum assured or the fund value is paid to the nominee.
No hidden charges – Good thing about ULIPs is that the charges are transparent and specified. It includes the premium allocation, administration, fund management and mortality charges, etc. and is deducted every year or month depending on the type of charge and policy terms.
Switching facility– The unique switchingfacilitybetween fund options is available for some funds which make it quite attractive as you can decide which fund to be in depending upon the market situation. You can also maintain your asset allocation following this strategy.
Partial withdrawals– The unique feature of ULIPs is partial withdrawals. You can withdraw partially from the fund to meet yourfinancial requirements without hampering the plan continuity. Withdrawals are generally allowed post completion of first 5 years of the plan.
Low premium paying term – You can choose a premium paying term which can be lower than the policy term.Example – you can choose 5 year premium paying term for a ULIP policy with a 20 year term.
Tax benefits– Premiums paid in ULIP upto Rs 150,000 in a FY qualifies for tax deduction under Section 80C of the Income Tax Act 1961. Since ULIPs are insurance plans, the gains and maturity proceeds are also tax-free under Section 10(10d) of The Income Tax Act.
Buy online – Online ULIP plans usually come withlower premium allocation charge as no commission is paid out to any agent or broker.
Therefore, we can conclude that the unique combination of insurance and superior investment returns makes ULIP a smart choice.