ULIPs have higher costs associated with it in the initial years because of the policy charges. Allocation charges, Fund management Charges, Mortality Charges, etc. makes ULIP costlier. Also, market fluctuations will lead to lesser returns as the amount invested would be slightly lesser in the first couple of years in the policy. However, overall charge structure for the term comes down significantly after the first three years with more funds allocated in the chosen funds. Introduction of new fee cap by IRDA will make ULIPs more attractive. As per this Insurance companies are not allowed to charge more than 3% for investments less than 10 years and 2.25% for investments more than 10 years. Over a period of time ULIP will help you to generate maximum revenue out of your investments.
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ULIP stands for Unit Linked Insurance Plan. A United Linked Investment Plan (ULIP) is an instrument which combines the security provided by an insurance plan with the opportunities provided by an investment plan. It is a unique product which aims to integrate insurance as well as investment requirements. Its structure is similar to that of a mutual fund. This is how it works :
ULIP is a combination of Insurance and Investment. Out of your total investments, a part will be used to provide life cover to the investor and the remaining amount is used to make investments in a Unit fund. A Unit is an element of the Fund in a Unit Linked Policy. As in mutual funds, investors in ULIPs are allotted units by the insurance company and a net asset value (NAV) is declared for the same on a daily basis. The total value of investments made in the ULIP changes according to the performance of the underlying fund chosen by you.
ULIP has some unique features that no other investment instruments offer. ULIPs offer features such as :
Majority of insurers offer a number of different funds to suit an investor’s financial objectives, time objectives, and risk appetite. The risks and the amount of returns associated with each kind of funds are different. The most common funds offered are :
In our previous article named “How to Read an Insurance Policy Document”, we have explained the common terminologies used in insurance, this will help you to understand the plan more effectively. When you look at the approved sales brochure before taking up a ULIP policy you should keep an eye out for the following details :
Following are the major benefits of ULIPs
Following are the major disadvantages of ULIPs
ULIPs are considered to be better for the people those who have a long term investments tenure. High charge structure in the first three years makes ULIP more expensive in the initial years. As we mentioned earlier ULIPs have higher costs associated with it in the initial years. Also, market fluctuations might make the fund to under perform and provide lower amount of returns. However, overall charge structure comes down significantly over a long period of time consequently allowing greater allocation of your premium in the chosen funds.
ULIPs also provide you with tax benefits. ULIP investments qualify for deductions under Section 80C of the Income Tax Act upto a maximum limit of Rs. 1,00,000. This holds true, irrespective of the nature of the plan chosen by the investor.
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