What are ULIP policies, and how do they operate?
Let us understand what ULIP is. A “ULIP Policy” is made up of two parts: investments and insurance. Because ULIP policies include life insurance, there are mortality charges. The fund component also looks for the ULIP returns. Daily announcements of the fund’s Net Asset Value (NAV) are made.
Your returns will vary depending on whether you select equities, debt, or balanced funds as your fund type. You can choose among funds with small, mid, big, or multiple capitalisations.
According to historical patterns, mid-cap funds had a five-year return of 12% and bond funds had an 8% return.
Also, the historical pattern over a five-year period indicates that equities ULIPS have provided returns of 4.1%, 9.85% in large-cap and 7.05% in multi-cap funds. For only a small additional fee, you can swap between the fund selections.
As a result, the insurance company collects all of your investments and invests them in the selected fund. Also, the overall corpus is split up into “fund units” each having a specific face value. Following that, you will receive “Units” in proportion to your investment.
Is investing in ULIPs a good idea?
Avoid purchasing ULIPS in a rush or as a last-minute tax-saving measure. You must connect your ULIP investments to your long-term objectives, such as marriage, higher education, etc. Due to this, you must invest in a plan that will both increase your income and assist you in reaching your financial objectives. Many criteria, including the rate of return, maturity period, and lock-in duration, must be chosen. **
What makes ULIPS a safe long-term investment?
The five advantages of ULIP plans that make them a safe investment option are listed below.
- First-time investors
Investors are gradually moving away from conventional investment plans and towards market-linked investment products and insurance contracts. When investing for the first time, it makes sense to get a ULIP policy because it combines insurance and investment functions into one policy. Make sure you understand all aspects of what is ULIP before investing.
The ULIP calculator is a simple tool that you can use to predict the return you might get at maturity by entering a few details.
- Lock-in time
Due to their five-year lock-in period, ULIPs aid in the instillation of investment discipline in investors. A single ULIPpolicy can be advantageous to you because it is a long-term insurance contract. You simply need to purchase it once to receive the annual tax benefit till the policy’s term is through (premium term).
- Potentially higher returns
Due to its equity advantage over other insurance plans, ULIPs can provide higher returns. Your ULIP policy premium is invested in numerous funds across various asset classes. They have historically produced double-digit returns and provide tax advantages. The maturity amount, however, is based on how the equity market does during the course of the tenure. Conversely, endowment plans likewise offer a lump sum payment at the end of the policy term, but they do not provide returns that outperform inflation.
The nicest element of ULIPS, compared to other investment options, is that the maturity amount is tax-free. Tax-exemption benefits are also provided by FDs, but they also have a lock-in period. Nonetheless, the returns provided are included in your income and are taxed according to your tax rate.
- Dual Advantages
ULIPs are a fantastic long-term investment vehicle since they qualify for a tax exemption of up to Rs 1.5 lakh under Section 80C of the Income-Tax Act. In the past, it has provided investors under the age of 45 with a minimum sum insured that is 10 times the annual premium.
Also, compared to when they were first established, Integrated Linked Investment Plans are now much more investor-friendly according to the New IRDAI rules. Other expenses, such as fund management fees, premium allocation fees, administration fees, and surrender fees, have also been decreased.
Investors like ULIPs for their ability to move between funds at any time during the policy period. Based on your objectives and level of risk tolerance, you can pick between equities, growth, balanced, and income funds. Four free switches are typically permitted each year.
ULIPs spare you from monitoring the companies that the fund invests in, unlike shares. To receive long-term advantages, all you have to do is choose a ULIP policy; you can modify your fund allocation at any moment during the policy’s term as long as you stick with it until maturity.
You can use a ULIP calculator to estimate the amount of future returns and the value of a ULIP investment.