Unit Linked Insurance Plans, popularly known as ULIPs, are insurance plans that provide the benefits of an insurance cover as well as a market-linked investment. ULIPs are goal-based financial solutions, linked to the capital market. Thus allowing the flexibility to invest in equity or debt funds, depending on the investor’s risk appetite. ULIPs help with capital appreciation over a long period of time, while providing insurance cover.
When you opt to purchase a ULIP from HDFC Life, you’re securing not just your financial future but your family’s future as well. Apart from providing life cover, these plans also allow you to choose how to invest your money. You can opt to invest in different funds that invests in equity or debt funds or a mix of both based on your risk appetite.
The premiums that you pay to purchase and maintain your ULIP is split into two parts. One part is used to provide you with life cover. The rest of the premium amount is invested on your behalf. Our fund managers will help you invest, but the choice of funds is ultimately yours.
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Types Of ULIPs
There are many different types of ULIPs that help achieve various financial goals and cater to different risk profiles. ULIPs can be broadly classified either according to their structure for generating returns or according to the kind of funds the premium amount is invested in. Here are some types of ULIPs popular with Indian investors.
ULIPs are market-linked. But that does not mean the premium amounts are streamlined towards equity investments only. With ULIPs one can choose other financial instruments to invest in. funds they invest in.
1. Equity ULIPs
In equity ULIPs, part of the payments is used to purchase equity shares, usually of multiple companies. This direct investment in equity makes it significantly more risky than other ULIPs, as the price fluctuations of the shares can directly impact the investment corpus. However, because of the very same reason, the potential for gains is also higher. Hence, equity ULIPs are ideal for investors with a high risk appetite.
2. Debt ULIPs
Investments made in debt ULIPs are directed towards debt instruments. This includes debentures, government bonds, corporate bonds, and fixed income bonds. These instruments pose low to moderate risk, making them a safer option. However, the returns from them are also moderate, and generally lesser than that of equity ULIPs.
3. Balanced funds ULIPs
To balance the risk to reward, some ULIPs offer the option to invest in equity as well as debt instruments. A portion of the fund is allocated to debt instruments with fixed interest rates and the rest is invested in equity. Doing so essentially lowers the overall risk factor of investing in only equity. This stabilizes the fund, resulting in reliable returns.
4. Liquid funds ULIPs
The credit rating for liquid funds ULIPs investments is often high, making them reliable options. It has a low risk factor and is ideal for investors looking for safer options. This type of ULIP invests the money in highly liquid market instruments such as certificates of deposit (CD) and treasury bills. Liquid funds ULIPs also have a short maturity period of only a few weeks to months. Hence, they are great for short-term goals.
5. Cash funds ULIPs
Cash funds ULIPs invest in monetary funds invested in banks. These instruments are exceptionally low-risk. Consequently, the returns they provide are the least amongst all ULIP types. Investors that are very much risk-averse can choose to opt for cash funds ULIPs.
ULIPs can also be classified according to the structure of the payments, payouts and the type of goal they are expected to fund.
1. Regular v/s single premium ULIPs
A regular premium ULIP requires the policyholder to make regular premium payments until the plan attains maturity. The interval of payment is often flexible. A single premium ULIP requires only a one-time premium payment at the time of purchase of policy.
2. Guaranteed v/s non-guaranteed ULIPs
Guaranteed ULIPs are focused on preserving the investor’s wealth while non-guaranteed ULIPs focus on wealth creation. Guaranteed ULIPs tend to provide stable returns over a long time while non-guaranteed ULIPs invest a bigger percentage of the premium into equity markets. Non-guaranteed ULIPs have the potential for higher returns, but come with greater risk.
3. ULIPs focused on different life stages
ULIPs also come as life stage-based plans that invest in both equity and debt, as well as progressively add low-risk debt instruments as the investor ages. For younger investors, the plans often begin with more equity instruments to tap into high returns and build wealth. With time the ULIPs aim for stable returns by lowering risk.
ULIP Plans FAQ's
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What are different types of funds that ULIPs would invest in?
Depending on one's financial goals and risk appetite, investors can choose between equity, debt and/or other instruments to invest in. Funds under ULIP include a number of instruments. The ratio of debt to equity held is different for every fund. A ULIP has multiple such funds to choose from.
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How much return is guaranteed in ULIPs?
The returns on ULIPs can vary because the investor gets to choose the combination of equity, debt, hybrid funds in their investment. ULIPs with less risk exposure tend to offer lower returns compared to high-risk equity ULIPs. However on an average, ULIPs can generate 10-15% returns over a longer period.
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What are the various charges associated with ULIPs?
The charges associated with purchasing a ULIP are as follows:
- Premium allocation charge is deducted from the premium amount before investing.
- Fund management charges are capped at 1.35% by IRDA, and they are different for every fund.
- Policy administration charges are payable monthly. The rate can remain fixed or increase at a predetermined rate.
- Switching charges may apply when a policyholder switches between fund options.
- Mortality charges compensate the provider if the policyholder's calculated life expectancy is not met. They are levied monthly.
- Surrender or discontinuation charges are levied for premature encashment of some/all units of the investment.
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How units are allotted under a ULIP?
Insurance providers collect policyholders’ capital and invest it in funds of their choice. After the amount is invested, the total is divided into 'units' of a specific value. These 'units' are allocated to the investor according to the amount invested by them.
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How can I track my ULIP’s fund value?
Fund value simply is the net asset value or NAV of a fund on the given day, multiplied by the number of units held by the investor.
For example, if a fund's NAV is ₹ 50 and an investor holds 3000 units of the fund, the fund value for the investor will be ₹ 50 x 3000 = ₹ 1,50,000.
Comparing the initial and current NAV shows a fund’s progress and returns earned.
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What are the main benefits of ULIP?
The main feature of ULIPs is that they are insurance plans that help build long-term wealth with their market-linked investment options. They offer a high return potential while also providing dual tax benefits, both on premium payments and on payouts/sum received after maturity.
*As per Income Tax Act, 1961. Tax benefits are subject to changes in tax law.
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Can we increase the premiums for a ULIP?
Investors that have been regular in their premium payments can opt for paying ‘top-up’ premiums, which are additional investments towards the plan. Investors can tap into the potential of a ULIP with good performance history and good returns with these extra premiums.
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Can we purchase a ULIP with only a single payment?
Yes. Policyholders can opt for a single premium ULIP which requires a one-time payment at the time of purchase of the policy, instead of regular premiums. After the maturity period, the policyholder receives the sum assured. Top-up premiums for these ULIPs may not be available during the first 5 years.
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Can we partially withdraw from the ULIP amount?
Most ULIPs have a lock-in period of 5 years after which the policyholder can choose to withdraw a part of their fund, if the need arises. This is done by ‘cancelling’ some of the units held. There is a limit to the amount that can be withdrawn and it may vary across plans.
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Can we surrender a ULIP at any time?
The entire fund value is paid to the policyholder if a ULIP is surrendered after the 5-year lock-in period. However, the process of surrendering the policy before 5 years is different. The amount will be paid to the policyholder only after the end of 5 years. However, the insurance provider will deduct discontinuance charges from the fund value. The balance is transferred to a Discontinued Policy (DP) fund and a fund management charge of not more than 0.5% is applied. The DP fund will earn interest over time to provide the minimum return guaranteed by the provider.
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