5 simple things you should know about ULIPs

Until some years back, the insurance market was ruled by the simple and straight forward, term and endowment plans. With the opening up of the sector, buying a life insurance policy came up with more options in the form of Unit linked Plans. Primarily insurance policies, Unit Linked Insurance Plans (ULIP) provide protection and also help accumulate wealth. Here are the 5 simple things which you should know about ULIPs -   

1) USP of ULIP

What sets ULIP apart from the traditional insurance policies is its ability to blend investment and insurance in one single plan. In a ULIP you get to invest in the capital markets, as per your risk profile, through its various fund options.

Key Advantages of ULIP

- Insurance Cover

- Tax Benefits under Section 80C

- Option of Systematic Investment

- Gives you a range of investment options to choose from as per your risk profile

2) How does a ULIP Work?

The premium in a ULIP goes towards meeting the insurance needs and towards building wealth. In the initial policy years, a large part of the premium goes towards policy expenses. Post the deduction of these expenses, the premium is divided between providing a life cover and making an investment.  Units are allocated for the amount invested, in a fund of your choice. The fund could be equity, debt, or a combination of the two. The value of the units allocated depends on the performance of the underlying fund. In the first 2 to 3 policy years, the fund value may remain low may remain low due to the high expenses deducted initially.

3) Costs involved in ULIP

Investments in a ULIP involve expenses such as:

• Premium Allocation Charges: This is the amount deducted from your premium to meet the costs relating to marketing and distribution. These charges are higher in the intial years and gradually reduce post the third or fourth year of the policy.
• Administration charges: Deducted on a monthly basis, this is towards the general administration costs of ULIP.
• Mortality Charges: This is the cost towards providing life insurance cover. This is a variable charge and is greatly dependent on the mortality rate of the insured.
• Fund Management charges: This is for managing your investments and is generally in the range of 0.5% to 2%.

4) ULIP and Tax Benefits

The premiums on a ULIP are eligible for tax benefits under Section 80C where a deduction of up to Rs 1 lakh from the taxable income of the individual is permitted. In case of policy holder’s death, the amount received by the nominee is totally tax free in their hands. The maturity too is classified as a payout under Section 10 (10D) and the entire amount is tax free in the hands of the receiver.

5) Surrender of ULIP

Unit linked insurance plans could be surrendered prematurely; however there could be cost implications On surrender, a percentage of the fund value is to be paid as surrender charges, depending on the scheme. In case where the ULIP is surrendered in the first three years, the insurance cover would cease immediately. However, the surrender value can be paid only after 3 years. So though the policy acquires a surrender value before completion of 3 years, it is payable only after the completion of three policy years. Many insurance policies also allow part surrender or partial withdrawal after 3-5 years without any cost and without any reduction in the insurance coverage.

Making the Most of Your ULIP

• Look at the long term: The most important thing about ULIP is that they are long term investments. You stand to gain the most if you stay invested till maturity. They are not to be looked as short term investment vehicles to earn quick gains.
• Be clear of your Objective: Your prime objective should be to have adequate life insurance cover to protect yourself from unforeseen events. Work out the required life cover on the basis of your age, income, and dependents.
• Customize your plan as per your requirement: You could use the various add-on benefits to customize a plan.

1. Riders: A rider with a ULIP is an additional cover along with the base policy available for an extra charge. This could be accidental death or disability benefit, or a critical illness cover.
2. Top ups: For an additional amount over your regular premium, you could increase your investment component in the base policy. In such cases, partial withdrawals are permitted generally only after five years.
3. Switches: You could switch your investments from one fund to another in case of changes in risk profile. Five to six switches are generally not charged for, further to which you may have to pay a nominal charge.