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What is meant by a ulip?

    IndianMoney.com Research Team | Monday, August 03,2009, 01:50 PM
 

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.

As we all know the number of financial products is increasing in the market. These products can be classified under two categories such as Customer Beneficial and Agent Beneficial. Increasing number of products will make the process of buying more complex because it will be very difficult to understand which product is good and which is bad. IndianMoney.com provides you reliable guidelines in all these matters within any charges.

Understand ULIP

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 :

  • You pay a periodic premium to the insurance company.
  • A part of the premium is used to provide you with an insurance cover.
  • The remaining amount goes to equity or debt market
  • In the event of death, nominees are paid the sum assured
  • In case of maturity of the policy total value of the fund will be paid to the policy holder.

Features of ULIP

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 :

  • Top up facility
  • Switching option (switch between funds)
  • Increase or decrease of protection level during the term of the policy
  • Cover continuance option
  • Surrender options
  • Riders that can be attached to the main policy to provide you added protection

Types of funds offered by ULIP

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 :

  • Equity Funds
  • Balanced Funds
  • Income, Fixed Interest and Bond Funds
  • Cash Funds

Things to be considered while choosing a ULIP

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 :

  • All the charges deductible under the policy
  • Payment on premature surrender
  • Features and benefits
  • Limitations and exclusions
  • Lapsing and its consequences
  • Other disclosures
  • Illustration projecting benefits payable in two scenarios of 6% and 10% returns.

Advantages of ULIP

Following are the major benefits of ULIPs

  • It covers your two requirements such as insurance and investment.
  • You don’t have to manage several investments.
  • ULIPs allow you the freedom to choose where your funds should be invested in.
  • Unlike normal insurance policies, you can choose to increase your premium payments for additional benefits in case you have surplus funds.
  • Switching option is available in ULIPs. It allows you to switch between different funds offered by the insurance company according to market fluctuations and your preference.

Disadvantages of ULIP

Following are the major disadvantages of ULIPs

  • ULIPs are more expensive than other kinds of insurance products.
  • Heavy allocation charges and other administrative charges will make the amount available for investment significantly restricted.
  • A ULIP investment takes longer to break even due to higher initial expenses; therefore, it is not an attractive investment in the short term.
  • One needs to be well aware of in the financial markets to maximize returns from ULIP by switching between funds at appropriate times.

Why ULIPs are good for long-term investment?

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.

Tax Benefit under ULIP

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.

IndianMoney.com Research Team

The research team at IndianMoney.com comprises of certified and experienced professionals who share the company's vision to make every Indian financially literate by equipping every Indian with right and unbiased advice. IndianMoney.com research team provides newsletters, articles, videos and FAQs on various financial products and concepts only to help you make wise financial decisions.

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