Facts to Be Aware of Before Investing in ULIPs
When you buy a Unit Linked Insurance Plan (ULIP), you should be likely in it for the long haul. You must be well aware of the different factors of the plan before you buy one. ULIP is a distinct product since it manages to provide life insurance along with investment opportunities. Similar to other life insurance plans, you have to pay premiums when you buy a ULIP. However, the premiums in ULIP are utilised differently by the insurance company. Half of the amount of premium is used towards providing a life cover. While the remaining half, investors put into funds of their choice.
Once you understand the meaning of a ULIP, it is essential to know some of its facts before investing in one.
ULIP facts that investors should know before buying one
● Facilitates wealth generation
When a policyholder stays invested for the long haul, they truly get the ULIP benefits as an investment. This is because systematically investing over the years adds up with compounding. Compounding is when you earn interest not only on the principal amount but also on the interest amount of the previous years. Over the years, this leads to the creation of a huge pool of funds. Also, features of a ULIP, like premium redirection and fund switch, allow investors to change their fund allocation anytime they want.
● Several options to pay premiums
There are several types of ULIP you can choose from depending upon the stage of your life and your goals. If you want to buy a ULIP in a single payment, you can choose a single-pay ULIP plan. In this plan, you have to pay the premium for your ULIP only once as a lump sum amount. If you want to choose a recurring payment option, you can choose regular-pay ULIPs. With them, you can make regular payments in intervals that you want, be it monthly, quarterly, or yearly.
● Newer plans have little to no charges
When ULIP was launched, there were several charges that one had to pay while buying the policy. The common charges that were levied were premium allocation, fund management charges, operational charges, and mortality charges. However, due to such high charges, not many people were buying ULIP. This led the insurance companies to reduce most of the charges and even eliminate some of them. The modern-day ULIP plans have little to no charges.
● Provides investment options based on risk-appetite
Even though ULIPs are linked to the market, you can choose the funds that you want to invest in. ULIP benefits a policyholder by providing several funds to choose from based on your risk appetite. These funds can be broadly divided into debt, equity, and balanced funds. If you are looking for low-risk funds, you can invest in debt funds. If you are willing to take the risk, there are equity funds which are high in risk and also rewards. If you want to strike a balance, there are balanced funds comprising equity and debt both.
● Several tax benefits
Since ULIPs involve life insurance, they also offer similar benefits. Meaning, that you can enjoy tax benefits similar to any other life insurance product. The premiums that you pay for your plan are subjected to tax deductions under Section 80C of the Income Tax Act. The coverage that your nominee can claim in your absence is also exempt from taxes under Section 10 (10D) of the Income Tax Act. These tax benefits are subject to changes as per law.
● It has a lock-in period
ULIP is a blend of investment and life insurance. When you are investing for the long haul, it is possible that at some point you need funds urgently. For such times ULIP offers free partial withdrawals. However, you can withdraw the money only after the lock-in period which is usually five years.
The facts about ULIP mentioned above will help you in making a better decision regarding which one to buy. Since ULIP is a unique plan, it has a lot to offer to the policyholder. Ensure you browse through several plans and choose the one that fits your needs.