A Unit Linked Insurance Plan (ULIP) was introduced in the Indian markets years ago. Although it combines the dual benefits of investment and life insurance, it did not appeal to many investors for specific reasons. Initially, a ULIP investment was only known for its high charges. However, the traditional ULIP plans were reintroduced after the Insurance Regulatory and Development Authority (IRDA) set new rules. Today, a ULIP policy is popular amongst investors for its low costs and high returns.
Before purchasing the new-age ULIPs, let’s understand these seven factors mentioned below to help you make the right buying decision:
1. Consider the ULIP charges.
When investing in a ULIP policy, you should regularly pay the premium towards the ULIP charges. While a specific proportion of your premium is invested in the ULIP funds, the remaining amount is deducted from the ULIP charges. As a policyholder, you should know the most common ULIP charges, which are as follows:
- Premium allocation charge
- Policy administration charge
- Fund management charge
- Mortality charge
2. Choose the right ULIP fund.
A ULIP policy is a flexible option for investment. When you purchase a ULIP policy, you can choose the available funds based on your risk appetite and investment goals. In simple terms, the more options, the more flexibility.
These are the following funds of a ULIP policy:
Equity funds are high-risk fund options that might guarantee high returns based on market performance.
- Debt funds
Debt funds are risk-free options that provide relatively low returns compared to equity funds.
3. Use the switching feature.
As you cross different milestones in your life, your risk appetite may decrease. For instance, when your family size increases, you might shoulder your loved ones’ more financial responsibilities. Hence, you might be less capable of taking risks, making the selection of debt funds essential. With the switching feature of a ULIP policy, you can shift from equity funds to debt funds as you grow older.
4. Stay invested for a long time.
When you purchase a ULIP policy, you can use the long lock-in period to your advantage. A ULIP policy has a lock-in period of five years. If you stay invested for five years, you can easily grow your funds to meet your life goals. The longer your investments, the higher the corpus.
5. Look for death and maturity benefits.
The primary objective of a ULIP policy is to provide financial protection to your loved ones. A ULIP policy offers a death payout to your nominees to maintain their current lifestyle in your absence. On the contrary, if you survive the ULIP policy, you might receive your insurer’s maturity benefits. As a policyholder, you should submit your discharge form and basic documents to obtain the maturity benefits.
6. Could you make use of its transparency?
You can buy a ULIP policy directly from an insurance agent or your insurer’s website. Online ULIPs ensure transparency since you can purchase a policy now from the website without a third party’s involvement. In addition to this, online ULIPs are not only time-saving but also convenient. As a policyholder, you can either purchase or renew your ULIP policy on your mobile phones in three simple steps:
Step 1: Select a ULIP policy.
Step 2: Purchase a ULIP policy.
Step 4: Pay the premiums online.
7. Avail tax-saving benefits
A ULIP policy offers one of the biggest advantages of helping you in saving taxes. Under a ULIP policy, you can claim tax deductions under Section 80C and Section 10(10D) of the Income Tax Act, 1961. Under Section 80C, you can claim a deduction on your taxable income up to Rs. 1,50,000, while the maturity payout is tax-free under Section 10(10D). The tax deduction is liable on premiums as well as maturity benefits.
A ULIP policy has raised the bar by providing low costs, high market-linked returns, and tax-saving benefits. However, you should ensure that you select a ULIP policy from a reputable company. Before purchasing a ULIP policy, consider your financial needs, compare various plans, and choose accordingly.
