What is ULIP?
Unit-linked insurance plan, popularly known as ULIP, is a multi-faceted investment product that offers the dual benefit of insurance coverage as well as investment exposure in equities or bonds. It means, along with getting life insurance protection for you and your family, this instrument gives you the potential to make wealth. Under this scheme, a small portion of your investment goes towards insurance coverage. In contrast, the remaining money is pooled with the assets of other investors and invested in either equities or bonds or even in both.
Understanding ULIP plan
ULIP is a relatively new product in the market that is more popular among youngsters because of its dual benefit feature. This investment instrument is very similar to mutual funds, where the investment is pooled from various other investors. The fund manager manages the investments, who bears the burden of keeping track of investments. The investment will be made on the funds of the policyholder’s choice as per the risk appetite of the policyholder.
Benefits of ULIP
Dual benefit
As discussed earlier, ULIP investment offers a twin benefit to the investor, which includes insurance coverage for the policyholders and their loved ones, and the policyholder can generate income through investment in funds.
Tax benefit
The premium paid towards ULIP investments is eligible for tax deduction under section 80C of the Income Tax Act 1961. Up to the amount of ₹1.5 lahks of the annual premium is exempted from tax. In addition, the maturity benefit is also exempted under section 10(10D).
Freedom
Investment funds are of two types Equity and debt one consists of a combination of both of them called balanced funds. ULIP allows you to choose the fund per your investment goal and risk appetite. It also offers a switch option that allows you to switch your money between equity and debt funds. Most of the policies provide a specific number of switches with no charges, but after the limit, the investor has to bear a small fee for switching the fund. It also provides the freedom to choose the life cover as per your wish and purpose. Usually, most policies offer ten times your annual premium as life cover, but one can select even the higher life cover.
Liquidity
Unit-linked insurance policies offer a partial withdrawal option which allows the investor to partially withdraw the money invested in the policy. This option is best to deal with the contingencies or a sudden requirement of funds for your child’s education. Usually, partial withdrawals are free of cost, and the policyholder can avail of them after the completion of the lock-in period.
Market linked returns
Besides the life cover, ULIP offers market-linked returns by providing a platform to invest in equity, debt, or balanced fund. Here you get the option to earn a high profit.
Transparency
ULIPS is an entirely transparent scheme; before investing in it, the insurance company provides all the information, including the charge’s structure, the worth of the investment, and the expected rate of returns.
Goal-oriented planning
ULIPs are designed to serve you to acquire your key goals, including the potential for wealth creation, savings for your child’s education or marriage, retirement planning, or any other purpose. You can also keep track to ensure the security of your future goal.
ULIPs Return
There are two separate ways to calculate the ULIP returns-
Absolute returns:
Annual return is the percentage increase in the total value of the ULIP, which is considered after eliminating expenses like management fees and operating charges.
Thus, absolute return = [(current value of ULIP – value at the time of purchase)/Value at the time of purchase] x 100
For example, if the value of ULIP at the time of purchase was ₹ 400, and the current value is ₹ 500, then the absolute return will be –
[(500 – 400)/400] x 100 = 25%
Compound annual growth rate
The compound annual growth rate is a calculation method considering the investment’s yearly growth during a particular period. It calculates the return received on investment year on year.
CAGR = {[(current value of ULIP/value at the time of purchase) ^ (1/number of years)] – 1} x 100
If the value of ULIP at the time of purchase was ₹ 400 and the current value is CAGR after five years will be –
{[(500/400) ^ (1/5)] – 1} x 100 = 4.36%
Conclusion
ULIP is a fantastic instrument to invest in, which possesses an n-number of benefits, but every investor should evaluate the market condition well before investing. Also, one should understand and know the kinds of funds in which they can invest their money. One must analyze their risk appetite before making any investment decision.
