Investment in equity gives high returns but there is a high risk factor associated with it. On the other hand investment in traditional insurance plans gives you protection against adverse and unforeseen events but there is no exposure to equity markets. Investment in banking instruments give you fixed returns with lesser risk but it will not help you to multiply your wealth so all the time will be in dilemma to choose the best investment option.
One of the best options to overcome all these issues is to put your money is ULIPs which is a hybrid instrument and is a combination of insurance and investment. But before going for ULIP you should get all the details about it and judge accordingly.
What does ULIP means?
ULIP stands for Unit Linked Insurance Policy. ULIP is life insurance policy which provides you with both risk cover and investment. ULIPs are not like traditional plans as it is subject to market risk where the risk is borne by you and investment risk is related to stock markets.
It enables you to secure protection for your family in case on any unfavourable event and at the same time you can get return on your premium invested. In simple words we can say that ULIP are the investment instruments, which tries to fulfill your investment need and saves you from the hassles of managing and tracking a portfolio with coverage for your life.
What type of funds ULIP offer?
You can find a wide range of funds to suit your investments objectives, risk profiles, and time horizon. Different funds have different risk profiles and return potential. Some of the funds are;
Unit fund is formed by pooling invested portion of the premiums paid by you after deducting all the charges and premium for risk over.
What is NAV?
NAV stands for Net Assest Value. It means the value per unit of fund on the given date. You can easily get the NAV’s of various ULIPs on the website of respective company.
What are the charges associated with ULIPs?
It enables you to secure protection for your family in case on any unfavourable event and at the same time you can get return on your premium invested. In simple words we can say that ULIP are the investment instruments, which tries to fulfill your investment need and saves you from the hassles of managing and tracking a portfolio with coverage for your life.
What type of funds ULIP offer?
You can find a wide range of funds to suit your investments objectives, risk profiles, and time horizon. Different funds have different risk profiles and return potential. Some of the funds are;
- Equity Funds - Medium to high risk
- Income/Bond funds - medium risk
- Cash/Money market funds - low risk
- Balanced Funds - medium risk profile.
Unit fund is formed by pooling invested portion of the premiums paid by you after deducting all the charges and premium for risk over.
What is NAV?
NAV stands for Net Assest Value. It means the value per unit of fund on the given date. You can easily get the NAV’s of various ULIPs on the website of respective company.
What are the charges associated with ULIPs?
All the benefits come with the cost so here also you have to bear some costs associated with ULIPs. The charge structure varies from insurers to insurers. But some of the common fees and charges are given below-
The money appropriated from the premium paid by you toward charges before allocating the units under the policy is called Premium Allocation Charges. It normally includes initial, renewal expenses, and commission expenses. This cost worst effects your returns and in initial years you have to more Premium Allocation charges then later years.
Administrative charges
You have to pay some charges out of your premium toward payment to the sale people/insurance agents/banks from whom you bought policy. It also includes the fees for administration of your plan this fee can be fixed or variable.
Fund Management Fees
This is one the most important charge which you have to pay for ULIPs. It is deducted as a percentage from the fund value. The fees levies for management of fund(s) and it is deducted before arriving the Net Present Value of the fund.
Mortality Charges
This is the cost that you bear for your insurance cover. It would vary depending on policyholder's age, sum assured and policy term. For ULIPs which pay higher of sum assured or fund value on death, Mortality Charge falls with time while ULIP which pays both the sum assured and fund value, it remains constant.
Fund Switching Charges
ULIPs give you the option to switch your fund to different equity or debt options which are applicable in your policy. There is a limited number of fund switches are allowed without charge but if you exceed that limits then you will be levied a charge.
Surrender Charges
ULIPs provide you to encash your units before the maturity date. When you go for premature partial or full encashment of units you have to pay Surrender Charges.
What are the benefits you get from ULIPs?
- Premium Allocation Charges
- Administrative charges
- Fund Management Fees
- Mortality Charges
- Fund Switching Charges
- Surrender Charges
The money appropriated from the premium paid by you toward charges before allocating the units under the policy is called Premium Allocation Charges. It normally includes initial, renewal expenses, and commission expenses. This cost worst effects your returns and in initial years you have to more Premium Allocation charges then later years.
Administrative charges
You have to pay some charges out of your premium toward payment to the sale people/insurance agents/banks from whom you bought policy. It also includes the fees for administration of your plan this fee can be fixed or variable.
Fund Management Fees
This is one the most important charge which you have to pay for ULIPs. It is deducted as a percentage from the fund value. The fees levies for management of fund(s) and it is deducted before arriving the Net Present Value of the fund.
Mortality Charges
This is the cost that you bear for your insurance cover. It would vary depending on policyholder's age, sum assured and policy term. For ULIPs which pay higher of sum assured or fund value on death, Mortality Charge falls with time while ULIP which pays both the sum assured and fund value, it remains constant.
Fund Switching Charges
ULIPs give you the option to switch your fund to different equity or debt options which are applicable in your policy. There is a limited number of fund switches are allowed without charge but if you exceed that limits then you will be levied a charge.
Surrender Charges
ULIPs provide you to encash your units before the maturity date. When you go for premature partial or full encashment of units you have to pay Surrender Charges.
What are the benefits you get from ULIPs?
Now you are aware about some of common charges and costs associated with ULIPs, let us look into the main benefits you get by investing in ULIPs. As you know ULIPs gives both risk cover and investment options but in fact the benefits are much more then this, some of them are listed below;
The main benefit you get from ULIPs is that it provides flexibility in your investment. ULIPs give you the flexibility to change your life cover. As you can change the sum assured at the time of policy inception. So you can increase the sum assured as and when you need .ULIPs also gives you a facility to choose the fund for your investment according to your investment preferences and needs.
Exposure to Markets
When you invest in ULIPs you are exposed to the stock markets which other traditional policies like endowment, term policy doesn’t provide. You are given lots of options under ULIPSs to choose from equity, debt and balance funds. You can opt for any of the above on the basis of your risk profile.
Diversified Investment Portfolio
The money you invest in ULIPs will be in turn invested in various securities and it diversifies your portfolio. As you know it gives you a package of investment which relieves you from investing in Insurance and Mutual Funds separately.
Transparency
ULIPs offer complete transparency which makes working of ULIPs clear to you. The portfolio or your fund can be viewed by you whenever you want. Here in ULIPS your can know where and how the money paid by you in form of premium is invested unlike other insurance policies. In most of the ULIPs you are given an option to stop premium payment after 3 years but in other insurance policies failure to pay premium leads to lapse of policy.
Tax benefits
As you know ULIPs have life insurance component attached with it, which gives you income tax benefits against your ULIP premium payment by the way of deduction and exemption both. Investment in ULIP saves Tax under section 80c up to Rs. 100000. The returns you get are also tax free except pension plans.
- Flexibility
- Exposure to Markets
- Diversified Investment Portfolio
- Transparency
- Tax benefits
The main benefit you get from ULIPs is that it provides flexibility in your investment. ULIPs give you the flexibility to change your life cover. As you can change the sum assured at the time of policy inception. So you can increase the sum assured as and when you need .ULIPs also gives you a facility to choose the fund for your investment according to your investment preferences and needs.
Exposure to Markets
When you invest in ULIPs you are exposed to the stock markets which other traditional policies like endowment, term policy doesn’t provide. You are given lots of options under ULIPSs to choose from equity, debt and balance funds. You can opt for any of the above on the basis of your risk profile.
Diversified Investment Portfolio
The money you invest in ULIPs will be in turn invested in various securities and it diversifies your portfolio. As you know it gives you a package of investment which relieves you from investing in Insurance and Mutual Funds separately.
Transparency
ULIPs offer complete transparency which makes working of ULIPs clear to you. The portfolio or your fund can be viewed by you whenever you want. Here in ULIPS your can know where and how the money paid by you in form of premium is invested unlike other insurance policies. In most of the ULIPs you are given an option to stop premium payment after 3 years but in other insurance policies failure to pay premium leads to lapse of policy.
Tax benefits
As you know ULIPs have life insurance component attached with it, which gives you income tax benefits against your ULIP premium payment by the way of deduction and exemption both. Investment in ULIP saves Tax under section 80c up to Rs. 100000. The returns you get are also tax free except pension plans.
Amazing article giving a great idea about ULIP's. It feels amazing to see such knowledgable content available free off cost.
ReplyDeleteI am thankful to Varun sir for sharing such amazing content.