ULIP Plans

Unit Linked Insurance Plans come with many features that make them a powerful investment tool. Here are some reasons why ULIPs are an important consideration while building an investment portfolio.

1. Flexible investment options

With ULIPs one can choose between high, medium and low-risk investment options by investing the premium in equity, debt, and/or other instruments. The choice is up to the investor, depending on their risk appetite, financial goals, and knowledge of the market.

2. Complete transparency

Before purchase all details of the investment, including charges, expected rate of returns, fund value and more, are shared with the investors. Investors are aware of the Net Asset Value or NAV of the fund at all times. Annual account statements & other quarterly reports regularly inform the investors about the status of their investment.

3. Dynamic savings with tax benefits

With ULIPs, investors can tap into market-linked growth without participating in stock market trading. Most ULIPs have a lock-in period of 5 years, after which the investor can partially withdraw from their plan if the need be.

Moreover, premiums paid towards the policy are eligible for tax deduction under section 80C of the Income Tax Act, 1961. And the best part is that returns from a ULIP upon maturity are exempt from income tax under Section 10(10D) of the Income Tax Act.

4. Life insurance

ULIPs are insurance plans that provide financial protection in the form of annuity payments and life cover. An annuity plan lets one build an investment corpus over a long time via steady payments, which then becomes a source of income after retirement. A life cover promises financial security for the life assured’s family in their absence.

A ULIP can be a great addition to a portfolio. However, whether or not one should buy a ULIP depends on the investor themselves and their requirements. One can opt for a ULIP if one has:

1. Difficulty managing multiple investments directed towards different goals.

To build an effective savings plan, it is important to invest in the right instruments and mutual funds across multiple asset classes. This holds especially true while investing in stocks and mutual funds because if a stock crashes or a certain fund underperforms for a while, the capital invested should not be lost. The idea essentially is to not keep all the eggs in one basket. An investment portfolio with diverse instruments is protected against any unprecedented market action resulting in unfavourable price action.

Finding the right mutual fund is not an easy task. Investors, especially beginners, may overlook some aspects of a scheme, such as performance history and risk-adjusted returns.
Moreover, mutual funds do not come with lock-in periods which eliminates the need to commit regular payments. This often results in a premature exit from the investment to channel funds for immediate and less important requirements. It is not conducive for long-term goals which require a more disciplined approach.

Keeping track of all investments over the years, including keeping the life insurance cover and charges in perspective, can prove to be difficult. ULIPs provide the benefit of investing in a diverse mix of instruments while providing life cover.

A ULIP offers more features than a standard life insurance policy. Most people have a protection plan in place, such as an insurance term plan, to insure themselves and their families. However, the benefit received from life insurance may come at a time where the long-term goals of the family are much later in the future. In such a case, the onus to manage the sum rests on the family. ULIPs offer a 'waiver of premium' feature that helps the policyholder ensure that their family receives funds at the time of a major financial requirement such as at the time of college admissions, or weddings. ULIPs with annuity plans

2. Long-term goals to finance. 

ULIPs generally have a lock-in period of 5 years. After these 5 years, the various charges associated with the policy are amortized. This means that the charges are capped at a lower percentage. Charges associated with ULIPs with a maturity period of 10 years or less are capped at 3%. In case of ULIPs with a term of more than 10 years, total charges are capped at 2.25%. Out of this, the fund management charges are capped at only 1.35%. This encourages investments for a longer term.

Either way, ULIPs generate the most value in long-term, over 15 to 20 years. This is due to the power of compound interest at play, with the aim of capital appreciation over a long period of time. By holding a ULIP, investors can save regularly towards future financial goals such as children’s education, their wedding, purchase of a new home, or retirement income. There is also the option for partial withdrawal if there is an important and absolute requirement, making ULIP a safebox for the investor’s wealth.

Moreover, ULIPs may come with the option of top-up premiums. These additional investments have charges of only 1-2%, which is lower than the charges levied on regular premiums payments. This would mean that top-ups allow for holding more units for lesser investment, effectively decreasing the average cost of ownership of each unit. Investing more in the same ULIP minimizes the charges associated with a new policy. Top-up payments also increase the insurance cover, hence providing an added benefit for investing more.

After you have taken care of all your regular family expenses, you save the balance for the future needs of the family . In other words, your family is dependent on you for their present as well as future needs. So, if something were to happen to you, there is a high likelihood of your family's dreams being thrown into disarray. But, don't worry! Marrying your investment and insurnace with these investment plans could help you secure the present and future of your family.

Even the best investments will not help on premature demise

Every investment that you make today is targeted to cater to a future goal. Ideally, you expect that once your investments mature they would help you meet your future goals. But till the time the investments mature and help the family achieve its goals there is always an element of risk.

Should something happen to you midway, this investment could very well be liquidated and prematurely withdrawn to fulfil the family's current needs. Even the corpus left after the partial liquidation will not suffice to meet the family's goals, be it child's higher education or spouse's retirement.

Insurance provides perfect support when you need it most

The risk to financial security of your family is much higher during the first half of your work life. Be it goals, such as your child's higher education or wedding, or, your own retirement, your savings remain very low in the initial phase.

For instance, if you are targeting to save Rs 50 lakh for your child's higher education 20 years down the line, and your investment earns a post-tax annual return of 8%, then you would need to save Rs 8,793 per month to achieve your goal.

But you will be able to accumulate only Rs 6.45 lakh in the first 5 years and Rs 15.93 lakh in the first 10 years, surely the sum that will not help your child fulfill her need for higher education.

It is in situations such as these that the life insurance coverage comes to the rescue and ensures that your family is able to fulfil the desired goals even in the event of your untimely demise.

Life cover fills the gap between the haves and the desired

During the course of your work life, your income will help you accumulate various assets, such as household appliances, gadgets, land, residential property, gold and deposits.

Over a period, certain assets will generate enough income to take care of your family's regular expenses. But if you are no longer there, acquiring these assets could remain just a wish, unfulfilled. Here, a life insurance cover could provide that bridge when there aren't many income generating assets available. Also, big-ticket items like car and home are typically bought with the aid of loans.

In the event of your untimely demise, your family would be left with no choice but to sell them off to repay the outstanding loan. This is where unit linked insurance plans (Ulips) from life insurance companies works so well.

They not only protect your family in your absence by covering living expenses but also allow your family members to keep enjoying the car and home bought with loans. Besides providing life cover, Ulips allow you to invest in equities which typically provide high growth during tenures of 10 years or more. The life cover ensures that other high growth investments such as those in equities besides the investment portion of Ulips still keeps growing. What's more, the cost of life insurance is quite low, especially for online plans.

Life insurance helps explore higher risk, higher growth investments

With an adequate life protection to take care of your family, you are better placed to take higher risk for higher reward investments such as equities. This will also help you go a long way in helping you save more in the long-term of 10 years or more.

Clearly, combining insurance with investment by investing in a combo product likes Ulip provides you with more benefits than what meets the eye at the first instance. The key is investing in the right Ulip.*

*Calculations shown in this article are based on assumptions which are mentioned therein and are not related to any product and are just for illustration purpose.