Depending on what is being insured and how the premium will be used, insurance is classified into several categories. Some of the commonly known insurance plans are life, health, automobile, and other insurance policies.
Another type of insurance is the Unit-Linked Insurance Plan (ULIP). It is a popular financial product that combines insurance with investment to maximize your benefits. ULIPs are integrated plans featuring insurance coverage as well as an investment return.
What is ULIP?
A ULIP plan provides you with the best of insurance cover along with an investment option that maximizes your benefits. These types of plans are primarily aimed at individuals who want the security of insurance coverage but also desire to earn some returns on their investments.
Some portion of the premium paid on a ULIP is capitalized through investments in different financial products. The investment may be in shares, mutual funds, or bonds as per your needs and preferences. The dual advantage of protection along with the flexibility to choose your preferred financial product makes ULIP a popular investment.
Reasons to buy a ULIP
Now that you know what is a ULIP plan, let us discuss the benefits that make it a popular investment choice. Here are five advantages of procuring a ULIP:
- Versatile
You are able to easily switch between different funds, which provide improved results and better choice. You may invest the premium in either debt or equity products based on the market conditions and your risk appetite.
- Risk profile
ULIPs allow you to invest in financial instruments based on your risk profile. If you are risk-averse, you may choose to invest in debt funds that offer a regular and safer investment return. On the other hand, if you are willing to assume more risk to earn potentially higher returns, you may invest the premium amount in equity products.
- Taxation benefits
ULIPs are types of life insurance policies. Therefore, these insurance policies offer taxation benefits through tax-free maturity. However, it is recommended you check with your accountant because taxation benefits depend upon the type of ULIP and some equity funds may be liable to taxes.
- Lower charges
Unlike certain types of insurance policies, ULIPs do not entail higher charges. The Insurance Regulatory and Development Authority (IRDA) has levied an upper limit on the charges that may be applicable to ULIPs. All charges are evenly distributed during the lock-in period, which reduces your upfront costs.
- Long-term investment
In the past, the minimum lock-in period for ULIPs was three years. This has now increased to five years. Therefore, when you stay invested in the ULIP for a longer period, you are able to take advantage of potentially higher returns on your investments.
Now that you have an idea of what is a ULIP, knowing its features is beneficial. Here are five such features:
- Transparency
You are able to control your investments when you purchase a ULIP. The insurers offer all the information related to the plan through brochures. Moreover, you get a free look period, which may be used to evaluate all the terms and conditions to avoid any issues in the future.
- Risk mitigation
The premium amount is invested in different funds and offers protection, which makes it a low-risk financial instrument. Such plans are an excellent option if you want to benefit from the market movement without investing in direct equities.
- Liquidity
ULIPs provide liquidity depending on the insurance company you choose to purchase the plan. At the end of the lock-in period, you may either withdraw your investment in full or make partial withdrawals as per your financial situation and requirements.
- Multiple investment benefits
One of the unique features of ULIPs is that these plans provide protection along with investment. Therefore, you are insured as well as you have the potential to earn returns on your investment helping you in wealth accumulation over the long-term.
- Flexibility
ULIPs are highly flexible financial products. You are able to choose the life cover as per your needs. Additionally, you may increase or decrease the premium amount based on your financial situation. Insurance companies also offer a top-up facility to maximize your gains through higher investments. Finally, you may include riders, such as critical illness cover for a nominal rise in the premium ensuring enhanced protection.
Types of ULIP funds
You may choose from different types of ULIP funds. Here are the different types of funds:
- Balanced funds
These funds invest in equity as well as debt instruments. This combines the security of returns through debt while providing you with the opportunity to earn higher returns through equities.
- Equity funds
The money is invested in company stocks. The primary objective is capital appreciation but subject to market volatility, due to which equity funds are risky.
- Cash funds
These are also known as money market funds and are safe investment options. Cash funds offer low-risk low-returns on your investments.
- Income, fixed, and bond funds
The money is invested in fixed income instruments such as government securities, corporate bonds, and debt funds. They combine secured and unsecured products and offer moderate returns on investments.
It is recommended you research all the various ULIPs offered by different companies. You must choose a plan that suits your investment goals to maximize your benefits. Additionally, compare the premium amount, expenses, and the past performance to make an informed decision.