How is your Unit-Linked Insurance Plan (ULIP) premium utilised

What is ULIP?

An insurance policy provides financial coverage to your loved ones against any unforeseen event. A Unit-Linked Insurance Plan (ULIP) gives you the benefit of investing in your future and a financial cover. On investing in a ULIP, a portion of your premium is allocated towards the insurance cover while the rest is invested in the market. These types of investment plans are ideal if you want to retire with a corpus.

How ULIP works?

When an individual invests in a ULIP, he/she needs to pay a fixed premium for the selected cover amount. While some portion of the premium is used for providing insurance coverage, the balance is invested in an Equity or Debt instrument.

When it comes to financial decisions, we usually tend to gravitate towards products that contain ‘More’ benefits. ULIPs are one such category of products that pack in multiple benefits in a single investment. ULIPs come with dual benefits of providing individuals with an insurance cover in addition to acting as an investment solution. ULIPs provide life cover and also help individuals create wealth by investing a portion of the premium in Debt or Equity assets.

By investing in ULIPs, investors can get the desired life cover and invest for their financial goals as well. ULIPs can create more value for investors. When an individual invests in a ULIP, he/she needs to pay a fixed premium for the selected cover amount. While some portion of the premium is used for providing insurance coverage, the balance portion is invested in an Equity or Debt instrument. Investors have the flexibility to choose between Equity, Debt and balanced options for their investment plan. Additionally, they also have the option to switch between investment plans during the course of the premium payment.

Fund Managers manage the investment according to the fund type and invest in Debt or Equity instruments. As per the Insurance Regulatory and Development Authority of India (IRDAI), the lock-in period for ULIPs is 5 years and its performance or ability to generate returns is linked to the market.

What you should know before investing?

By virtue of being market-linked, ULIPs contain a higher risk element as compared to the traditional Life Insurance policy. One can choose to reduce the risk by opting for different funds having varying objectives. You can select these funds based on your style of investing. If you are a risk taker, you can opt for a more aggressive fund or if you are a risk-averse person, you can opt for a more conservative fund. The risk factor can also considerably be reduced as ULIPs offer the option of switching between funds depending upon your risk appetite at that specific time.

ULIP benefits

Insurance – One of the primary benefits of a ULIP is the life insurance cover that it provides. By investing in a ULIP one can protect their family from uncertain events and ensure that the family is well taken care of in case of an untimely death of the insured individual.

Financial goals – The other major benefit that ULIPs provide is their ability to generate wealth through investment in Equity and Debt assets. For long-term goals, investors can choose to invest in ULIPs. They can choose from Debt, Equity or balance options, according to their need, risk profile and investment time horizon. Since ULIPs have a compulsory lock-in period of 5 years and insurance, in any case, is a long-term product, investments in ULIPs can benefit from the power of compounding and eventually generate significant returns for the investor.

Tax benefits – According to the Income Tax Act, 1961, the premiums paid towards a ULIP are eligible for a tax deduction under Section 80C. The maximum allowable deduction under this section is Rs 1,50,000. On maturity, the returns from the policy are exempted from Income Tax under Section 10(10D).

In addition, to the above three major benefits, ULIPs are easy to invest in and offer investors the flexibility of switching between investment plans. As investors’ circumstances change, so does their ability to assume risk. By allowing investors to switch between Debt and Equity at no additional costs, ULIPs ensure that as an investor you are able to build an optimal investment portfolio that accurately reflects your risk-return requirements.

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