While we all wish to draw rich benefits from our long-term investments, securing our family’s future from unforeseen events should also be an important consideration in our financial planning. One of the best ways to secure your family is to buy enough insurance cover that can address all major future expenses in case of any unfortunate event. However there is a catch to pure term insurance policies; the money spent on paying premiums does not grow with time and once the insurance term is over, the investor gets nothing out of it.
On the other hand, money invested in equity market can bring handsome dividends over time but they do not cover us from the uncertainties of the life. Wouldn’t it be nice if there was an investment vehicle that serves both the objectives—long-term capital gain and life-cover for our family—at the same time? That’s where ULIP comes in.
A Unit Linked Investment Plan, popularly known as ULIP, is an investment instrument that combines the benefits of both life insurance and investment in capital markets. A part of the premium is used to cover the risk to life and the remaining towards investment in money market instruments to derive long-term capital gains for the investors. ULIPs as an investment can be rewarding especially when you remain invested over a longer period of time.
Investing in ULIP is clearly a wise decision. There are a plethora of ULIP plans out there in the market and choosing one can be a daunting task. The article explains few points that can help you choose a plan that best fits with your investment goals and insurance needs.
In simple terms, ULIP is a life insurance product that offers life cover to you along with the option to invest your money in stocks, bonds and mutual funds. Investment under ULIP gets you tax benefits under Section 80C, 80D and 10. The first ULIP plan was launched in India in the year 1971, and since then, many financial organizations have come out with a variety of ULIP plans with different benefits.
As a smart investor, you need to do your homework before you invest in ULIPs. Select few reputed insurance companies offering ULIP plans and check their fund performance over the last few years by tracking the Net Asset Value (NAV) of the fund. The NAV value reflects the returns delivered by the fund over a period of time. The NAV is calculated based on the market value of the equities and bonds held by the fund minus the operational overheads, divided by the total number of units issued by the fund to the investors.
A higher NAV demonstrates a stellar performance by the fund and makes it a good bet for your new investments. In addition to that, check the investment philosophy of the fund. Some funds are aggressive in equity investments to deliver higher returns to the investors whereas some others prefer to play it safe by investing mostly in debt funds. You must ensure that the fund’s investment philosophy matches with your own.
Because ULIP is also an insurance product, it makes sense to check the fund’s performance in covering its investors. Check the claim settlement ratio of the fund to gauge it’s past performance in settling claims raised by the investors.
The annuity associated with a ULIP plan helps you build handsome capital returns over a period of time. At the time of maturity of a ULIP, you can use the annuity to purchase your dream home. Your capital gains from a ULIP can also help you put a good down payment towards your new home and make you eligible for a favourable home loan.
ULIP is one of the most popular investment options if you are a retail investor and are looking for decent gain from your investments and also for a comprehensive life cover for your family. The part of the money put into the stock market generates good returns over the years, while the insurance cover offers much-needed security when your family needs it the most. Apart from a slew of advantages attached with ULIP—including that of Tax benefit under Section 80C, the flexibility to switch between funds depending on market conditions and on one’s risk appetite gives ULIP a unique advantage in managing your investments.
For instance, an investor with a high-risk appetite can opt to put all his money into equities whereas a risk-averse investor can opt to put all his investments into relatively safer debt funds. There is also an option to put your investments into balanced funds, wherein a part of the investment is put into equities and the remaining into safer debt instruments. Obviously, no other investment option can match such flexibility.
ULIP Plan Types
Broadly, ULIP comes in two different types. The first one is based on purpose and the second one is based on death benefits.
Purpose-based ULIPs come in categories designed for children’s education, retirement, wealth creation and health benefits.
- Child - Child plans are most popular among retail investors as parents put utmost importance on education and want to save for these future costs. Such plans offer monetary support for the child’s education at various stages such as high-school graduation, college graduation and so on. In case of the unfortunate death of a parent, the plan ensures that the child’s education is not impacted and he/she can continue their long-term education plans. Understandably, investing in such a plan ensures your child’s future.
- Health - Health is yet another concern for all and planning for old age health expenses is a prudent step. ULIPs can help you achieve your objectives. An investor in health-cased ULIP gets financial coverage to meet any untoward hospitalization expenses.
- Wealth Creation - The ULIP for long-term wealth creation is beneficial for the younger generation and new entrants into the workforce, who can utilize their long investment tenures to build capital over a period of time. They can afford to invest in high-growth, high-risk equities to maximize their gains. The annuity built over time can be utilized to achieve future goals such as buying a home or a four-wheeler.
- Retirement - In general, the ULIP for retirement is useful for everyone. In this case, you need to pay a regular amount of premium during your employment years. Once you retire, the deposited amount is paid as an annuity to help you settle in your retired life and meet any unexpected expenses. Parents often want to help their children financially even when they are retired. A good annuity can help achieve your plans and secure the future of your children.
ULIP based on death benefits
ULIP based on death benefits falls under two broad categories.
- Type-1 ULIP based on death benefit- This plan is advantageous for your family. In your absence, the nominee receives either the sum assured or the accumulated fund value, whichever is higher. For instance, say you have taken a ULIP plan with a sum assured of Rs.30 lakh, and has accumulated only Rs.12 lakh as a corpus in a duration of 4 years. In any untoward situation, your family will receive the sum assured amount of Rs.30 lakh even if the fund value is just Rs.12 lakh. Moreover, the mortality charge in Type-1 Plan reduces with each passing year as the corpus amount grows and therefore, the risk reduces with time.
- Type-2 ULIP based on death benefit - Under this plan, in case of an untoward incident, the nominee receives the sum assured amount in addition to the accumulated fund value. However, the added benefit comes with higher premium as the insurer has to cover the mortality risk of the investor to pay for the higher sum assured amount. The premium is high also because the plan covers age-related health risks which increase with time. Going back to the earlier example, if you have accumulated a corpus of Rs.12 lakh and the sum assured amount is Rs.30 lakh, in case of the death of the investor, the nominee receives a total amount of Rs.42 lakh i.e. Rs.30 lakh sum assured amount plus Rs.12 lakh of fund value.
ULIP is the most sensible investment for small investors to build capital and secure their family. With that in mind, Insurance Regulatory and Development Authority (IRDA) is promoting ULIP to retail investors. IRDA also monitors ULIPs offered by different insurance companies and formulates regulations to protect the interests of the investors.
A ULIP will surely help you channelize your savings and help build long-term wealth to meet your future expenses. A healthy fund balance also makes you eligible to apply for a car loan or home loan. To conclude, ULIPs are your best bet to meet your long-term financial goals and at the same time protect your family from any contingency that may come along as you plan your future.
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Updated Date: Jan 31, 2018 17:44:30 IST