A life insurance policy is key to your financial planning. The choice of plans in the Indian market gives you ample scope to opt for the ones that eminently suits your long term financial goals. The vital issue in this scenario is to select the type of plan to match your goals. It is pertinent to learn the basic of insurance so that you can focus on the plan or plans if your resources permit, as each category caters to different goals. Knowledge of the mechanics will allow you to decide where to invest and whether you need to invest in ULIP plan in India and why
What is Life Insurance?
It is a product sold by the insurance provider to cover you for life risk against a premium for a fixed term. There are two payouts – First is the death benefit paid to your nominee on your demise and the second is the maturity benefit paid to you should you outlive the policy term. The different basic life insurance plans are:
- Term Plan: A simple pure risk policy that offers only death benefit.
- Endowment Plan: It provides life risk cover with savings facility. You get both the death and maturity benefits in this plan.
- ULIP: This is a plan that covers your life risk and offers you investment features. It is locked in for 5 years and pays both death and maturity benefits.
What is ULIP?
The Unit Linked Insurance Plan is a unique combination of life insurance bearing investment features. Naturally, it is an aid to your wealth creation in the long term. The insurer allocates your premium into two areas – life insurance and the balance into market instruments that are potentially high yielding vehicles, such as:
- Equity Fund
- Debt Fund
- Balanced Fund.
It is designed to sync with your long term goals which could be your retirement, children’s education or marriage or any other event that may be important to you.
When you invest in ULIP plan, the insurance company breaks up your premium into two components. The first is allocated to cover your life and the second is invested in various market instruments keeping the risk involved in mind. The fund manager of the company manages these investments on your behalf sparing your active participation in the creation of a portfolio. However, you have the flexibility to switch funds among the portfolio depending on your risk appetite as well as your knowledge of market forces. The market linked returns being higher you stand to gain aiding your wealth creation. These features make it attractive for you to invest in ULIP plan.
Term of ULIP:
Like any life insurance product, when you invest in ULIP plan you are required to remain committed in the long term. Any benefit to be tangible needs your staying invested for a period of at least 10 to 15 years. In the case of ULIP.IRDAI has mandated a lock-in period of 5 years.
Reason to invest in ULIP plan:
There is a range of benefits when you invest in ULIP plan. Some of the major ones that Influence you are:
- Life Cover: The most important feature is the life risk cover provided to you. The protection of your family is ensured in the event of your demise.
- Fund Long Term Goals: Your financial plan is the blueprint defining your long term goals. The beneficial effect of compounding is reaped only in the long term. The mantra is to stay invested for long to help you achieve your goals, be it your retirement, your child’s education or wedding.
- Flexibility: You are free to switch your portfolio in alignment with your risk appetite. This is sure to provide you with peace of mind regarding the safety of your investments despite the volatility of the market.
- Tax Savings: This is an important incentive when you invest in ULIP plan. The premium you pay in a FY is tax exempt up to a maximum of Rs.1.5 lakhs. The receipt of both the death and the maturity benefits is also tax free without any amount cap. The former is covered by Section 80C and the latter by Section 10 (10D) of the Income Tax Act, 1961.
Different types of ULIP:
Like other regular policies, ULIP are also of different types. There are broad parameters to categorize ULIP.
- Invested Funds:
- Equity Fund: The risk is high.
- Debt Fund: The risk is low:
- Balanced or Hybrid Fund: The risk is moderate as the investment is in a mix of equity and debt funds.
- End use of Funds:
- Pension and Retirement planning
- Child education
- Wealth Creation
- Death Benefit:
- Type I ULIP: The payout in the form of the death benefit to the nominee is higher of the sum assured value or the found value.
- Type II ULIP: The payout of the death benefit to the nominee is sum assured plus the fund value.
Charges you must know to invest in ULIP plan:
It is important to know the various charges applied to ULIP for fund management. However the IRDAI has capped the total impact of charges in ULIP plan in India in such a way that the RIY (Reduction In Yield) at maturity is capped at 3% for plans of 10 years or less, and 2.25% for plans above 10 years. The charges that will impact the RIY with suggestive names are:
- Premium Allocation Charge.
- Mortality Charge.
- Fund Management Charge.
- Partial Withdrawal Charge.
- Switching Funds Charge.
- Policy Administration Charge.
The best ULIP Plan in India to invest:
In the current scenario here is an indicative list of the best performing ULIP plans to invest:
- PNB Metlife Smart Platinum.
- Bajaj Allianz Future Gain
- HDFC Life Pro Growth Plus.
- Sbi Life Wealth Assure.
- MAX Life Fast Track Growth Fund.
Given the advantages, it is wise to invest in ULIP plan for more reasons than one. The provision of life cover along the fruits of investment makes sense to invest in ULIP plan. Being very similar to Mutual Funds, the suitability of tax regime with exemptions covered under the Sections 80C and Sections 10 (10D) of the Income Tax Act, 1961 makes it simple to handle, rather than the Capital gains Tax applicable to Mutual Funds. As a long term investment reaping the harvest of superior returns in a life insurance product makes it truly worthwhile to invest in ULIP plan.