The advantages of life insurance and investing are combined in a unit-linked insurance plan (ULIP), a type of financial instrument. The investment helps you reach your financial objectives while the life cover ensures the financial security of your loved ones in the event of an unforeseen circumstance.
Depending on your risk tolerance, ULIPs provide you with the option to invest in high-risk equities funds that offer higher returns, low-risk debt funds, or a combination of the two. You can swap between funds and earn returns matching your objectives and needs. You have total control over your investments with ULIPs. Because of this, ULIPs are a great investment choice for a variety of objectives, including retirement, home ownership, and funding a child’s higher education.
The ULIP return calculator is a simple tool that you can use to predict the return you might get at maturity by entering a few details.
Here are six of the many benefits of purchasing ULIPs:
- Dual I-I Benefit: ULIPs offer life insurance that offers insurance benefits to the insured’s family members during the term of the policy. This is known as a dual (I-I) benefit of investment and insurance. When the insurance matures, it also gives returns on investment. The policyholder authorises the investment of the specified instrument with a preset fraction of the total premium (debt and equity). They can achieve their financial objectives over the long run with the help of this diverse investment portfolio.
- The triple EEE (Exempt-Exempt-Exempt): ULIP tax benefits are available to ULIP policyholders. This shows a policyholder’s eligibility to claim a tax rebate for each of the three stages—investment, returns, and withdrawal. They can deduct the premium they pay from their taxable income each year. The best aspect of ULIPs is that, unlike mutual funds, they are tax-free. After the lock-in term has passed, the policyholder may withdraw their fund and earn returns. Hence, the maturity amount or sum promised is free of all taxes with ULIP tax benefits.
- Top–up: The Top-Up Advantage lets policyholders enhance their investments through ULIPs. With the help of the top-up facility, they can increase the amount of money for their present coverage. If their current fund has been performing well, customers can easily add extra funds to the current premium amount to take part in the fund’s expansion.
- Switch option: The ability to switch allows policyholders to alter their level of exposure to equity, hybrid, or debt funds in accordance with their risk tolerance and the performance of various funds. Also, depending on the investor’s level of risk tolerance, different amounts are invested in debt and equity securities. Perhaps the only financial instrument that gives policyholders flexibility is ULIPs. With this “switching” option, policyholders can transfer all or part of their investment from one fund to another without incurring any fees.
- Costs Structure– ULIPs typically have 5 different charges: a policy administration fee, premium allocation fees, a fund management fee, a surrender fee, and a mortality fee. The administration fee is assessed for ULIP upkeep. Due to the underwriting cost fund management, the policyholder would incur higher premium allocation charges during the initial period. Charges for fund administration typically vary from 0.5% to 2%.
When the policyholder surrenders the policy before the maturity date, a resignation fee is due.
The policyholder pays greater fees in the first several years. Over time, the costs involved will decrease, and returns will increase. The policyholder need not worry about any of these five fees because ULIPs provide strong long-term returns. The IRDAI regulations limit the ULIP costs to a maximum of 3 percent. Hence, the policyholder will pay less and can earn better returns.
- Lock-in Period: ULIPs typically have a lock-in period of three to five years or longer. After the lock-in period is up, the policyholder has the option of terminating the coverage. The accrued corpus is transferred to a discontinuation fund in this situation. All insurance companies are required to give the insured a refund. The discontinuance fund’s main objective is to disburse money from the failed plan. Liquidity is not provided to the policyholder during the lock-in period. After the lock-in time is up, the insured may take money out as needed. After deducting any applicable discontinuance or surrender fees associated with the relevant policy, the money will be given. The insurance company may only charge for fund management costs after the lock-in period has ended.
You can use a ULIP return calculator to estimate future returns and the value of a ULIP investment.
