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All about ULIPs

May 04, 2009 18:09 IST

With the changing financial scenario, more and more people are curious to know the intricacies of various financial instruments that are there for the picking. One such investment instrument is a United Linked Investment Plan (ULIP).

Here are the answers to some of the common questions asked with regard to ULIPs.

What is a ULIP?

A United-Linked Investment Plan (ULIP) is an instrument which combines the security provided by an insurance plan with the opportunities provided by an investment plan.

What are its features?

In ULIPs, a part of the investments made by the investor is used to provide life cover to the investor and the remaining amount is used to make investments in a unit fund.

The allocated (invested) portions of the premiums after deducting all the charges and premium for risk cover under all policies in a particular fund as chosen by the policy holders are pooled together to form a Unit fund.

A Unit is a component of the Fund in a Unit-Linked Policy. As in mutual funds, investors in ULIPs are allotted units by the insurance company and a net asset value (NAV) is declared for the same on a daily basis. The value of investments made in the ULIP alters with the performance of the underlying fund opted by you.

ULIPs also offer features that no other investment instruments offer. ULIPs offer features such as:

  • Top up
  • Switch between funds
  • Increase or decrease the protection level during the term of the policy
  • Cover continuance option
  • Surrender options
  • Range of riders which can be attached to the main policy to provide you added protection 

ULIPs also provide you with tax benefits. ULIP investments qualify for deductions under Section 80C of the Income Tax Act. This holds true, irrespective of the nature of the plan chosen by the investor.

What are the types of funds offered in a ULIP?

The majority of insurers offer a number of different funds to suit an investor's financial objectives, risk appetite and time objectives. The risks associated and the amount of returns associated with each type of fund is different. The most common funds offered are:

  • Equity Funds
  • Income, Fixed Interest and Bond Funds
  • Cash Funds
  • Balanced Funds

What aspects of ULIP should you watch out for?

When you look at the approved sales brochure before taking up a ULIP policy you should keep an eye out for the following details:

  • All the charges deductible under the policy 
  • Payment on premature surrender
  • Features and benefits
  • Limitations and exclusions
  • Lapsing and its consequences
  • Other disclosures
  • Illustration projecting benefits payable in two scenarios of 6% and 10% returns as prescribed by the life insurance council

Are ULIPs good for long-term investment or short-term investment?

ULIPs are considered to be better for long-term investments because of the following reasons:

Higher product costs in the initial years: ULIPs have higher costs associated with it in the initial years because of charges which go towards the policy charges.

Also, market fluctuations will tend to provide lower amount of returns as the amount invested would be slightly lesser in the first couple of years of the policy.

However, overall charge structure for the term comes down substantially over a long period of time thus allowing greater allocation of your premium in the chosen funds.

Market Fluctuations: Market fluctuations can hamper returns in the short-term. However, long-term, market linked investments not only yield very attractive returns, but also have the least downside to them.

To get the best out of your ULIP, you should remain invested in the ULIP for the long-term of at least 6-10 years.

What is better? ULIP or Term Insurance?

The answer to this question lies in the expectation we have from our insurance plan. If our objective of investing in an insurance plan is only to provide life cover the term insurance makes sense.

However, with term insurance, at the end of the policy term is reached in your lifetime,  you get no returns. Essentially, all the money that you have paid towards the premium gives you no return.

However, if the same investment was down in a ULIP, you would have life cover as well as a sizable amount of returns.

What are the advantages and disadvantages of ULIPs?

Advantages

Disadvantages

Flexibility -- you can choose your term, insurance cover, pay premiums for a limited period

Flexibility -- this can act a disadvantage since the person may use the withdrawal and may not end up building a huge corpus

Transparency -- you know what is the amount you are paying for the various benefits

Initially heavy costs -- You pay around 15-40% for the first year and then around 5%for the next two years

Tax free returns -- 100% tax free since they are received from insurance and it is a contract

No control on costs

Switch between various options

One may try to time the market and may make errors

Tax benefits when investing under Sec 80C

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