Are you planning to buy a Unit-Linked Insurance Plan? Then you should be well aware of its different aspects. A ULIP is an effective way of merging your life insurance needs as well as investment plans. For the uninitiated, a ULIP policy is mainly an insurance product that also has an investment element attached to it. The premium for your ULIP is used for two purposes – to help build the life cover you have chosen and to invest in the financial instruments of your choice. So, when you buy a ULIP, you are securing your distant future and those of your loved ones as well in case an unfortunate event occurs with you.
To make the most of your ULIP, you should select the right kind of plan. Checking off the points mentioned here can be a great help in that process.
How do ULIPs work?
The insurer pools together the investment amount of your premium with those of others. This lump-sum amount is then invested into the instruments you have chosen. You can choose from a variety of market-linked funds, low-risk funds, and even a hybrid mix of both for a balanced portfolio. This makes ULIPs a suitable option for a variety of investors. As per your share in the lump-sum amount, the insurer allocates a number of units to you. Once the investment gains returns, the insurer distributes them as per the number of units the investor owns.
To get a deeper understanding of the returns you can expect in a ULIP plan, you should take the help of a ULIP calculator.
What to check before buying ULIPs
- Your risk appetite
As mentioned earlier, ULIPs are a good option for all kinds of investors. You can choose from equity funds, debt funds, or a balanced fund type. Within equity funds, too, there are multiple options, such as high-cap funds and low-cap funds. However, before you invest in them, you should understand where your risk appetite stands. Equity funds bring in more heightened returns, but they also involve a higher level of risk. Debt funds incur very fewer risks and are, hence, a good option for investors with a low-risk appetite who are comfortable with relatively low returns.
A ULIP calculator can greatly help you understand the differences in the returns from each kind of fund.
- The ULIP charges you will incur
When you buy a ULIP, you have to pay several charges to compensate for the various benefits you will enjoy as a policyholder. However, not all insurers levy the same set of charges. Some common charges found in most ULIP policies include premium allocation charges, fund management charges, surrender charges, partial withdrawal charges, and so on. There is a misconception that ULIPs are not a good investment option because of these charges. However, as IRDAI has put limits on these charges and there is increasing transparency within ULIPs, these misconceptions are on their way out.
Regardless, the ULIP charges that the insurer levies are one of the most important things to consider before buying a ULIP plan.
- Payment and pay-out options
While drawing a ULIP plan, remember to check the kind of premium payment and lump sum pay-out option you want. You can pay your premium in a lump sum amount or over regular installments over the tenure of the plan. Similarly, there should be options for multiple pay-out options as well. This will help your loved ones get the financial help they want in a proper manner.
- Your tax-saving strategy
ULIPs can increase your tax benefits considerably. ULIP premiums can be claimed as tax deductions up to Rs 1.5 lakhs as per Section 80C of the Income Tax Act, 1961. The pay-outs, such as surrender value pay-out, maturity benefit pay-out, and so on, are tax-exempted, too. Therefore, one of the most important things to consider before buying a ULIP plan is the tax aspect, especially if you have made investments in other tax-saving instruments under 80C.
Remember to limit your premium payments such that they help your ULIP funds grow while allowing you to retain maximum taxes along with other instruments.
The most important thing you should check before buying a ULIP plan is the terms and conditions of the plan. Read the inclusions, exclusions, and other policy wordings very carefully before you invest in a ULIP policy.