ULIPs have emerged out as a preferred investment option for many conservative Indian investors.
Unlike in the earlier days, when investors preferred investing in life insurance policies to secure their future, the scenario has changed completely in the present decade. They are now more open to the idea of investing in market-linked securities that generate a higher return.
For a conservative investor, ULIPs came out as a saviour for them. ULIP in India was first launched in 1971 by UTI and then by LIC of India in 1989. But, ULIPs gained popularity only after 2010.
Let’s have a look, what are ULIPs and should you invest in it.
What are ULIPs?
Unit Linked Insurance Plan is an insurance policy issued by life insurance companies that offers you the potential of wealth creation, as well as life cover. The premium paid is partly allocated to the life insurance policy and partly is invested either in equity or debt funds.
The fund just works like mutual funds, where the investments are managed by qualified fund managers. Here, you have the option to choose between the type of fund (equity or debt) based on your risk appetite and long term goal. You also have the flexibility to switch the funds mid-term based on your requirements and performance.
ULIPs have a lock-in period of 5 years and the scheme doesn’t offer any guaranteed returns to investors.
What is the Purpose of ULIP?
ULIPs can be used for the following purposes:
For Retirement: In this plan, you pay the premium during the whole tenure of your employment to build a corpus. Post your retirement, the corpus amount is used to purchase an annuity fund that helps you to get regular payment for life.
For Wealth Creation: ULIPs can also be used to accumulate wealth over a long period or for meeting specific financial goals of life. It offers the required flexibility to fund any future goals.
For Child Education: ULIP can also be used to secure your child’s future by creating a lump sum amount for meeting a child’s education needs and also protects from any unforeseen situation.
Types of ULIP
ULIPs are broadly classified into three types based on investment types, they are:
Equity Fund: The part premium is invested in equity stocks and equity-linked securities, thereby offering higher return potential and also higher risk.
Balanced Fund: The part premium is invested both in equity and debt securities which helps to offer a moderate return and also minimises risks
Fixed Interest and Bond Fund: This type of fund offers a fixed return and has the lowest risk profile. The funds are invested in debt securities issued by corporates and governments.
Cash Fund: Also known as money market fund, cash funds are the safest kind of funds and the policyholder receives a set amount of returns at maturity.
Benefits of ULIPs
ULIPs are best for goal-based planning like a retirement fund, children’s education fund or wealth creation. And, the best part, you know a part of the premium is going towards securing your future financial goals.
Flexibility to Choose Life Cover
While buying a ULIP, you decide on the percentage of premium going towards life coverage and minimum life coverage amount. The minimum life coverage offered is 10 times of your annual premium. And, also some insurance companies provide as much as 40 times of your annual premium.
Flexibility to Choose your Investment Type
You can choose the fund type you want to invest, based on your goal type and risk appetite. For example, if you are investing in a retirement fund and don’t mind taking a bit of risk, then equity funds are best for you. And, as you near the retirement age, switch to debt funds to secure your corpus and to have guaranteed returns on investment.
Income Tax Benefits
The premium paid is fully eligible for tax deduction under section 80C of the Income Tax Act. Also, the maturity proceeds are fully exempt from tax under section 10 (10D).
My Take: Are ULIPs Beneficial?
The one thing, many would not tell you, ULIPs are neither a good insurance product nor make a good investment. Despite being a popular option, they fall short on providing adequate benefits to policyholders.
Then why are ULIPs a popular option among users? This is due to three factors. First, people mix insurance and investment. Second, people don’t understand the product and most of them buy it to take benefits of 80C. Third, higher commission to agents, so they push harder to make a sale over other investment products.
What are the alternatives to ULIPs?
The best way is to look at the two purposes (insurance + investment) separately. It will help you get adequate coverage and higher returns on investment to meet your financial goals easily.
For example, investing in mutual funds will help you get higher returns. And, for securing the future of your loved ones, buy a term plan, which offers higher life coverage at affordable premium rates.