Is it a good idea to invest in ULIP plans? There has been a lot of debate revolving around the effectiveness and efficacy of ULIPs or unit-linked insurance plans. These combine the safety of a life insurance plan with market-linked financial investment offerings. A part of the premium paid by you will be invested across debt or equity funds while the other portion will be used for insurance coverage purposes. These are products where the investment and insurance benefits are fused for your benefit and are available across all leading insurance companies, online investment platforms and brokerages.

There are several types of unit-linked insurance plans that you can consider across leading insurance providers. The combination of insurance and investment will have a 5-year lock-in period and customers can choose to invest across mid, large or small-cap stocks along with balanced or debt investments, based on their risk tolerance. There is also a provision to easily switch across to other funds if the current ones are not performing too well.

Why should I invest in ULIP now?

Like other financial offerings, ULIP will also come with a charge/fee although IRDAI, the regulatory authority for the insurance sector, has sizably lowered these applicable charges over the last few years. There are four key charge types for ULIPs, namely premium allocation charges, policy administration charges, fund management charges and mortality charges. Ever since ULIPs made their online debut, the policy administration and premium allocation charges are not imposed on customers since intermediaries are not as involved. However, upon the maturity of these plans, investors also get back mortality charges, making ULIPs special products for investments that come with free life coverage.

Fund management charges have also been set at approximately 1.35% per annum at present. Depending on the prevalent situation in the market, insurance providers will allow investors to transfer investments to another fund from their existing one and this can be done as many times as you wish. You will, of course, have to pay fees which hover between Rs. 2-5,000 on an average. You will get major benefits pertaining to tax deductions. Your investments will be eligible for deductions up to Rs. 1.5 lakh under Section 80C for ULIPs. Tax savings will naturally be a major benefit of investing in ULIPs right away. Most large insurance companies have offered 10% returns on investments in ULIPs as well. The insurance amount is mostly set at 10-15 times of the premium amount. Plans with coverage up to Rs. 1 crore could have six-digit annual premiums while term insurance plans are comparatively cheaper but do not offer returns or any other benefits.

Some other things worth noting

You can easily invest in ULIPs via your trusted life insurance company or online investment app/platform. Several insurance companies provide the facility of online investment as well. These are insurance-based policies with a dual purpose of getting insurance coverage along with earning returns on investments. The insurance company usually floats its fund like a mutual fund house for garnering money from its investors and the money gathered is invested in stocks, bonds and other assets. However, the difference from mutual funds is that they do not come with life insurance coverage like ULIPs.

An example will suffice in this case. Suppose a person invests Rs. 1,00,000 in ULIPs while another individual purchases units of mutual funds for a similar sum. All the money is invested for both people but for the first person, a part of the investment will be taken as the coverage for insurance or premium. This gets him coverage of roughly Rs. 10 lakh (assumption). The second person will have to separately purchase insurance policies/coverage. In the case of the first person’s untimely demise, the company will pay out Rs. 10 lakh or the fund value, whichever is greater, to his/her family but the facility will not be available for the second person. There are ULIPs available in the market which come with added protection via inbuilt benefits or riders. These will suit those who are saving for particular needs and worry about them not being catered to in case of their absence in the future.

There are for example ULIPs which offer lump sum assured upon the demise of the parents for meeting higher education needs of children. The company will also keep paying premiums of the fund in such cases. There are plans which come with a regular income for the family for the remaining policy tenure as well. ULIPs, as mentioned, will help you save immensely on taxes although mutual funds do not always help you save taxes. The only ELSS will be eligible for similar tax deductions under Section 80C.

What you should do

If you want your investment to have higher liquidity then you should choose mutual funds. ULIPs come with minimum 5-year lock-in periods and you cannot redeem the investment in this period. Not all mutual funds will have high liquidity levels and ELSS funds come with 3-year lock-in periods too. ULIPs will be ideal if you are looking at creating wealth as per a long-term financial blueprint along with seeking insurance coverage simultaneously.

Whether for your children’s higher education, retirement or meet other financial goals, ULIPs that are continued till their maturity periods will always give you a major advantage, namely a dual benefit of protection and savings alike through a single plan. They are also good for those who are not as market savvy or lack knowledge of various mutual fund options but wish to benefit from capital appreciation in the long term with equity investments.

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