Table of Content

1. What Is a 5-Year ULIP Policy?

2. How Does a 5-Year ULIP Policy Work?

3. Why Choose a 5-Year ULIP Policy?

4. How Are 5-Year ULIP Return Rates Calculated?

In this policy, the investment risks in the investment portfolio is borne by the policyholder

Unit-Linked Insurance Plans (ULIPs) are a popular investment option among Indians looking for insurance and investment benefits under a single policy. ULIPs have evolved over time and now offer different investment horizons to suit the needs of various investors. One such investment horizon is a 5-year ULIP policy. Let's better understand how a ULIP investment for 5 years can help you meet your financial goals.

What Is a 5-Year ULIP Policy?

A 5-year ULIP policy is a type of insurance policy that offers life coverage and investment benefits for a limited period of five years. At the end of the tenure, the policyholder receives a lump sum payment of the sum assured and investment returns. The sum assured is the minimum amount the policyholder is guaranteed to receive on maturity.

How Does a 5-Year ULIP Policy Work?

Your ULIP for 5 years works by splitting your premium into two. A small part goes towards providing you with life coverage. The rest gets invested into various debt and equity funds based on your investment objectives. A fund manager helps look after your investment to generate the required returns. You can also trigger fund switches to maximise returns depending on dynamic market conditions and evolving financial needs.

We can understand how a five-year ULIP works better with an example. Rajesh, a 40-year-old engineer, purchases a five-year ULIP to help him meet his short-term goal of buying a second vehicle for his family. He selects a plan offering life coverage of INR 20 lakhs and pays monthly premiums. He invests in a mix of debt and equity funds. Rajesh knows if anything happens to him during the policy term, his family will receive the sum assured payout of INR 20 lakhs, or the fund value, if it is more than INR 20 lakhs, which will help them take care of financial obligations. At the end of the policy term, Rajesh earns a return on his investment, enabling him to purchase a second vehicle for his family.

Why Choose a 5-Year ULIP Policy?

Opting for a 5-year ULIP offers many benefits. Here's why you should consider purchasing a plan:

• Short-Term Investment Horizon

  A 5-year ULIP policy is a great investment option for investors with a short-term investment horizon. If you want to invest your money for a short period, a 5-year ULIP policy can be a good option.

• Flexibility

  A 5-year ULIP policy offers a lot of flexibility to investors. The policyholder can choose the premium amount and the investment funds. Additionally, they can make fund switches during the policy term.

• Tax Benefits

  The premiums paid towards a 5-year ULIP policy are eligible for tax benefits under Section 80C^# of the Income Tax Act, 1961.

  Proceeds received on surrender/partial withdrawal/maturity of ULIP plan are exempt from tax subject to provisions mentioned in Section 10(10D)^# i.e if the premium payable for any of the years during the policy term does not exceed 10% of the death sum assured.

  In addition to the above, for policies issued after 1st Feb 2021 tax exemption on maturity proceeds will be available if premium paid in any of the years towards such matured polices does not exceed INR 2,50,000. Out of the total matured policies in a financial year, exemption u/s 10(10D) will be available only towards those polices whose aggregate premium in any years does not exceed INR 2,50,000/.

  Income from rest of the policies exceeding the mentioned limit will be chargeable as capital gains.

  The death benefit sum assured paid to beneficiaries is tax-exempt.

• Life Coverage

  A 5-year ULIP policy also offers life insurance benefits to the policyholder. In the event of the policyholder's demise during the policy term, the nominee receives the sum assured.

How Are 5-Year ULIP Return Rates Calculated?

ULIP returns in 5 years depend on the performance of the investment funds. The returns are not guaranteed and change based on the market performance of the investment funds. The policyholder can invest in equity funds, debt funds, or a combination of both. Equity fund returns are generally higher than debt fund returns but come with higher risks. The 5-year ULIP return rates are calculated based on the fund's net asset value (NAV). The NAV is the value of the fund's assets minus its liabilities.

ULIPs are one of the most flexible and rewarding investment options for investors. A 5-year ULIP policy can be an excellent choice for those who wish to invest for a short period and earn good returns with tax benefits. It provides a significant opportunity for individuals to invest their money in a systematic and disciplined way. ULIPs offer a unique blend of insurance and investment to help individuals achieve their financial objectives while providing valuable life insurance coverage. Before investing in a ULIP, investors should consult with a financial advisor to ensure they make an informed decision that aligns with their investment goals and risk tolerance.

Related Article

• Understanding ULIP Insurance: A Comprehensive Guide for Beginners
• An explanation of whole-life ULIPs
• Confused between Sum Assured and Fund Value in ULIPs? Know them at your fingertips

ARN - MC/06/23/2604