Unit Linked Insurance Plans, commonly referred to as ULIPs have been a preferred choice for many an investor who want an insurance product combined with investment. These are generally products of long-term duration – 5,10 or 20 years, wherein regular contributions to the ULIP fund are allocated towards life insurance and the other in investment component, the mutual fund. The investor has the option to pay a premium monthly or annually. Investors further have the option to choose equity or debt or both, depending upon their own risk taking appetite.While traditional insurance plans give 4%, 6% or 8%returns, one can double his return on ULIPs by opting for an equity option which has the potential to double your money in the long-term.
So the moot question that an investor has is how to go about choosing the best ULIP plan?
Well you have to keep a few things in mind and if you follow them, then your ULIP investment is not bound to result in a dead investment or one with low returns.
Zero in on your financial your goal before investing in ULIP
Depending upon one’s financial goal from ULIP investment and the time horizon one can choose an appropriate ULIP plan. You have the option to invest in equity, debt or a mix of both. Returns on each would depend on your risk appetite and goals. ULIPs also offer balanced funds, where an investor can enjoy the best of both worlds – equity and debt. If your goal changes, reallocation or switch of your ULIP investment is allowed. So have clear financial goals, to minimise disappointment later.
Decide on life cover
ULIPs offer insurance component, to meet your financial goals such as child’s education or retirement planning or securing your family. Therefore, choosing the right amount of insurancefor you to get closer to your financial goals is very important. ULIPs also allow lump sum or one-time investment in the insurance component for your retirement. Hence decide on an appropriate insurance cover.
ULIPs are for long-term
ULIPs are a vehicle for long-term investment that help one to realise his financial goal and create wealth, in addition to providing life cover. So go for ULIPs for long-term of 5, 10 or 20 years. If you stayed invested this way then you also become entitled to bonuses in the form of Loyalty Additions and Wealth Boosters which will grow your wealth further.
Tax benefits
Under the Income Tax Act, 1961, you can save taxes on your hard earned money with Unit Linked Insurance plans. These include tax benefits on premium payments under the Sections 80C, 80CCC and 80D. The capital appreciation is not taxable. One can switch between equity, debt or balanced growth options depending on changed financial goals. Lastly an investor receives tax free Maturity Benefit. It however ought to be noted that tax benefits are subject to conditions u/s 80C, 80CCC, 80D, 10(10A) and 10(10D) of the Income Tax Act. And, Tax laws are subject to amendments from time to time.
So choose your ULIP plan after considering the taxation aspect.
Knowing ULIP charges are important
Understanding charges before taking up an ULIP plan is important. As this investment offers both Protection and Savings, knowing the charges with these benefits is a must. These could be Premium Allocation charge, Policy Administration charge, Mortality charge and Fund Management charge. Normally overall charges reduce over time leading to wealth creation. At the same time charges are also subject to changes in line with fund costs.
Thoroughly know your ULIP benefits
To get the best out of your ULIPs, you should understand its benefits. They are Fund Switch, already mentioned earlier; Premium Redirection which is an option to invest your future premiums in a different fund of your choice other than your base fund. This apart ULIPs also allow Partial Withdrawals from your corpus and lastly; Top-upswhich is an option that allows you to invest your surplus money, either once or multiple times in your existing policy.
To conclude, it is imperative therefore that an investor reads and understands the product brochure carefully, for this will help him make the right decision.
