Life insurance policies are a major component that matches your financial blueprint for your future objectives, in a safe and secure template. It is a form of allocating your fund for yields in the long term to build a corpus while covering your risk of life. As a tool that provides you dual cover, there is no better bet than a life insurance policy. Catering to the primary rationale of a life cover along with investment feature makes ULIP a unique policy for you to explore. By its very nature, the ULIP is a life insurance policy that gives the best results when you stay invested for long after the initial lock-in period of 5 years is over.
What is ULIP?
It is an acronym for Unit Linked Insurance Plan that over and above the life cover provided to you, gives you the feel of investments with superior yields from market instruments. A part of the premium after being earmarked for the coverage of life risk is invested in the capital market, with an aim to hive off higher yields to help you grow your money faster.
What are the different ULIP Funds in the market?
There are many ways of categorizing ULIP Funds depending on the different perspectives towards mobilizing your investment prudently in a meaningful strategy. Accordingly the many classifications are:
- Investment Target: It is the most popular classification based on risk and investment target.
- Equity Funds: The money being invested in equities and socks of companies makes it the riskiest of all. However, matching the high risk, the yields are also high.
- Debt Funds: Your ULIP funds are invested in fixed income government securities like treasury bills and corporate bonds. The nature of such investments carries low to medium risk providing matching yields.
- Cash Funds: The money is directed towards low-risk money market instruments and bank deposits. Being ideally suited for a low risk or zero risk profile, the returns are also low.
- Balanced Funds: Investment of ULIP funds are directed towards a blend of equity and debt fund instruments in order to temper the risk factor between high and low. The ratio is such that the investments are categorized as a medium risk with high rewards.
- Investment Objective:
- Child Plan: The most popular amongst this plan is for your children’s education. It helps you meet an important life goal covering for the increasing cost of education and within the envisaged time frames. Your child’s education continues unhampered even in your absence.
- Pension Plan: This is typically designed to build a corpus for your post-retirement needs. A long term proposition, designed ideally to continue until your retirement to help you lead a comfortable post retired life.
- Health Plan: The coverage for medical emergencies is an important component of your investment planning. The rising cost of healthcare and the complications involved, makes an investment into such plans smart.
- Wealth Creation Plan: Highly recommended option where you are mainly focused on wealth creation that may come in handy for your other non-specific life goals.
- Death Benefit: Classification of ULIP funds under this category creates two plans, which are crucial as to how the death benefit is treated.
- Type I: The death benefit disbursed to your nominee is in the form of the sum assured or the fund value, which is higher of the two. In the initial years, the fund value being low, the sum assured is higher.
- Type II: The death benefit paid to your nominee is the total of both the sum assured and the fund value, for which you pay a higher premium.
With ULIP, you are offered a bunch of riders that help you add value to your cover and enhances the death benefits in many ways. The most important riders worth exploring are:
- Accidental Death and Disability Rider: The provision of these riders helps your nominee reap the benefit when such an event occurs.
- Critical Illness Rider: Certain critical illnesses like heart attack and organ failure may incapacitate you. You are covered by a lump-sum payment as per terms of the rider on the first diagnosis of these diseases.
- Waiver of Premium: In the event of accidental disability and critical illness your capacity to earn is impaired. With this rider in place, you enjoy a waiver of future premium without hampering the continuity of your policy.
- Term Rider: In addition to the payment of death benefit to your nominee, a monthly inflow is assured in terms of this rider.
Benefits of ULIP Funds:
Of the many pros, the most important advantages of ULIP Funds are listed below to help you make an informed decision for buying a ULIP:
- Double Benefit: You get a unique feature of investment along with cover for life.
- Methodical Savings: Through the purchase of a ULIP, the habit of compulsory savings is inculcated in you. It helps build your future corpus brick by brick over a long period of time.
- Choice of Fund: Not everyone is disposed towards risk of funds on the same scale. There is bound to varying risk profile. ULIP allows you to choose the best funds that are in sync with your risk perceptions.
- Freedom to Switch: You are free to switch between funds depending on their performance and other market influences.
- Tax Savings: The investment in ULIP attracts the usual tax savings in the form exemption under Section 80C of the Income Tax Ac, 1961 up to Rs.1.5 lakhs in a FY. The maturity benefits are exempt under Section 10 (10D).
How does ULIP work?
At any given time period, there are several ULIP subscribers paying a premium into the same portfolio. A part of the premium, after deduction adjustments are invested into instruments like equity, debt and balanced subject to your preference. Your invested ULIP funds are converted into units and the value of such units is known as NAV (Net Asset Value). These allocations are handled by professional fund managers employed by all the insurers. Operating and expense charges are recovered, but IRDAI has imposed a cap on such charges to make it competitive.
ULIP funds offer a unique opportunity to you to make the best out of a life insurance plan. The life cover and investment feature makes ULIP one of the most coveted investment options that is not only safe, but also high yielding. The dual benefits offered are seldom obtained in any instrument in India other than ULIP.