ULIPs: Double the Benefits, One Smart Choice
Unit-Linked Insurance Plans (ULIPs) offer a smart way to manage your finances. This plan combines the security of life insurance with market-linked investment. It provides two essential benefits within a single product. When a premium is paid, it is divided into two distinct components. One part secures the life cover for the insured individual, and the remaining amount is invested in market funds. This article explains everything you need to know about unit-linked insurance plans.
How does a ULIP work?
A ULIP plan operates by allocating your premium towards both protection and wealth creation. This structure ensures both immediate and long-term financial needs are addressed. Let's understand how ULIP works with the help of an example.
Consider Praneeth, who started a plan at age 32. He plans to stay invested for the next 28 years. Part of premium provides life cover and the other part of premium invests in market-linked funds.
Scenario 1: Praneeth survives the full tenure
If Praneeth survives the entire 28-year tenure, he receives the accumulated fund value. This money helps fulfill his financial goals effectively. The fund value represents the total worth of all units accumulated over 28 years.
Scenario 2: Praneeth's untimely demise
If Praneeth passes away at age 42 before completing his tenure, beneficiaries receive a payout. The amount will be higher of either the sum assured or the accumulated fund value. This structure provides financial support, ensuring the family receives the assured sum.
How is the ULIP plan structured?
A ULIP plan divides your premium into two distinct components serving specific purposes.
Life insurance component
A portion of your premium provides life insurance cover called sum assured. In case of the policyholder's demise during the policy term, the nominee receives the death benefit. The sum assured gets determined at policy inception based on age, premium amount, and chosen coverage.
Market-linked investment component
The remaining premium portion gets invested in market-linked funds. You have flexibility in choosing how this part gets invested based on risk tolerance:
The equity funds invest in stocks with high returns, which may be suitable for investors with a high-risk appetite and a desire for long-term capital growth. A debt fund invests in fixed income instruments such as bonds, which offer stable returns. This may prove beneficial to conservative investors who place a higher priority on capital preservation than aggressive growth. A hybrid fund provides a balanced approach since it invests in both equities and debt.
Professional fund managers oversee these investments and provide regular Net Asset Value (NAV) updates. You can switch between funds without tax implications anytime. Additionally, a ULIP calculator can help you understand how different fund allocations might perform based on your investment amount and time horizon.
Features of ULIP plans
Several features make ULIP plans flexible and adaptable to changing financial needs.
Fund switching facility
ULIP plans offer multiple fund options, allowing switches between funds within the same plan. Generally, 10 free switches are available annually. After this limit, fund-switching charges may apply. This feature allows adjusting the investment portfolio according to fund performance and changing risk tolerance.
Partial withdrawal option
ULIP has a lock-in period of five years from the policy issue date. During this period, you cannot withdraw funds partially or surrender the policy. After completing five years, partial withdrawals are allowed, keeping the remaining investment active. Additionally, full withdrawal before maturity is not permitted.
Top-up premium facility
The top-up premium facility allows investing additional amounts in the existing plan. This helps take advantage of market opportunities, enhancing wealth accumulation. It serves as a flexible way to enhance the overall investment corpus.
Option to add riders
You can customise an existing ULIP plan by adding riders like critical illness or accidental death benefit. These add-on options enhance policy coverage significantly. If diagnosed with a critical illness, the insurance company pays a defined lump sum for treatment costs.
Choice of multiple fund options
You can create an investment portfolio based on financial goals and risk appetite. Options generally include equity funds, debt funds, or balanced funds. With these options, you can customise an investment strategy for wealth creation.
Varying policy terms and premium payment modes
ULIP offers flexible duration and premium payment frequencies. You can choose policy tenure aligning with financial goals. Various premium payment frequencies include monthly, quarterly, half-yearly, and yearly options.
Who should buy a ULIP plan?
ULIP plans are market-linked investment opportunities suitable for individuals above 18 years.
Those seeking long-term investment opportunities
ULIPs yield optimal results when invested for long-term, typically 10-15 years. This allows investments to leverage compounding power. This helps to build a significant corpus for retirement or child education.
Individuals seeking combined insurance and investment
Individuals seeking life cover and investment elements in a single plan can buy a ULIP plan. Some part of the premium is allocated towards life cover, while the rest is invested in market-linked assets.
Conclusion
ULIPs are integrated plans combining life cover and investment components, making them valuable for long-term planning. With features like flexibility, market-linked returns, transparency, and tax benefits, investors can achieve financial goals effectively. Trusted platforms like Tata AIA offer ULIP plans, helping individuals align investments with their financial goals, time horizon, and risk profile. By having a thorough understanding of this plan, you will be able to make informed decisions to protect the financial security of your family and build wealth for the future.
Disclaimer: The information provided above is for informational purposes only and is not intended as professional or legal advice. The Insurance Regulatory and Development Authority of India (IRDAI) is not responsible for any decisions made based on the information.
Disclaimer: This article is published in association with Tata AIA and not created by TNM Editorial.