ULIP is a Smart Choice of Investment

Unit linked insurance plan or ULIP policy is a market-linked insurance product that combines the very best of investments and insurance into one. A ULIP insurance 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 makes ULIPs the preferred choice of a new generation. This is the reason why ULIPs contributed 14.13% of the total Insurance Industry premium during the FY 2017-18. (Source: timesofindia)

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 a ULIP policy for an annual premium of Rs 100,000 for 20 years; the plan gives him 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 the chosen 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.

Choice of funds-Insurance Companies offers a variety of funds while buying a ULIP policy. 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 markets following aggressive investment strategy, debt funds follow a conservative investment strategy and balanced funds take a middle path by investing both in equities and debt.

This is an important ULIP benefit. You are assured of a minimum 10 times life cover on the annual premium paid as per IRDAI guidelines. In case of death, higher of the sum assured or the fund value is paid to the nominee.

The good thing about ULIP insurance 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.

The unique switching facility between 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.

The unique feature of ULIP insurance is partial withdrawals. You can withdraw partially from the fund to meet your financial requirements without hampering the plan continuity. Withdrawals are generally allowed post completion of the first 5 years of the plan.

This is an essential ULIP benefit. You can choose a premium paying term which can be lower than the policy term. Example-you can choose a 5-year premium paying term for a ULIP policy with a 20-year term.

Premiums paid in ULIP up to Rs 150,000 in an 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)¹ of the Income Tax Act. Tax benefits² are subject to changes in the tax laws.

Online ULIP policies usually come with a lower 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.