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Planning To Invest? Here's What You Need To Know About ULIPs

ULIPs allow you to diversify assets among various funds ranging from equities to debts.
Planning To Invest? Here's What You Need To Know About ULIPs
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Planning To Invest? Here's What You Need To Know About ULIPs

“How can I get rich?”

This question keeps coming back to our minds from time to time. But most of the time, we fail to find a quick answer to this.

The answer, however, is simple and everybody knows it- “Growing your money can make you rich”.

The next obvious question, then, that hits our minds is-“How can I grow my money?”

Now, this is a tricky one. A lot of people believe that starting a new business is the best way to grow their money manifold.

But here’s the deal: It takes money to make money.

So, if you don’t really have a substantial amount of capital to invest in your new business initially, you can start with capital market investments to grow money and meet your financial goals.

Direct investment in equity can be risky and would require a lot of research and constant market monitoring by the investor. On the other hand, there are some other instruments available in the market, which are both risk and hassle free and provide income tax benefits. Some such investment instruments include - ELSS Funds, Bank FDs and NSCs, PPFs and VPFs, ULIPs and so on.  

Among all these investment options, ULIPs rank second (after ELSS), in terms of safety, returns, flexibility, transparency, liquidity, costs and taxability of income, as per the annual assessment made by The Economic Times for the year 2015. 

It is estimated that, ULIPs have given up to 9.8% returns in past three years. So, today we will get acquainted with ULIPs that’s constantly raked alongside some of the best investment plans in India.

So, let’s get started! Shall we?

The Dramatic Fall & Rise of ULIP

The advent of Unit Linked Insurance Plans (ULIPs) was thought to be a revolutionary event in the Insurance sector. ULIP was indeed different, in many ways, from any other available investment instruments. However, the best part of ULIP was that, it brought about a fusion between investment and insurance.

Once a highly sold product, ULIPs gradually started losing its popularity to other investment instruments like mutual funds, etc. Especially around the year 2008, the market of ULIP fell dramatically.  

There were many reasons behind the fall of ULIP. They were expensive, and often failed to offer the expected returns to the investors. Added to this were the ever-pursuing insurance agents, who lured prospective customers into buying ULIPs by promising them higher returns and hiding the high charges. Hence, many of those who were lured into buying ULIPs regretted heavily, making it the most hated investment products.

Surprisingly, ULIPs rose to popularity again after September 2010, when IRDA brought out new regulations governing this investment plan. As per the new regulations, charges under ULIPs were capped, making it economical; the lock-in period was extended from 3 years to 5 years; and the basic sum assured became 10 times the annualized premiums. These changes contributed tremendously to the gradual re-acceptance of ULIPs as one of the best investment plans in India.

Why Should You Invest in ULIP?

Since there are a number of investment tools, you must be thinking why one should invest in ULIP at all. You are not alone. A large fraction of people believe that it’s better to buy a term plan for life coverage and invest in a mutual fund for wealth creation, separately. The idea is not bad. But, the problem of investing in a term plan is that you receive no returns, if you outlive the entire policy term. The huge sum of money that is payable under a term plan, is enjoyed only by the beneficiary, after your death. So, apart from the tax benefits, you actually enjoy no gain by investing in a term plan.

A mutual fund is a good investment tool. But it involves huge risks. Moreover, a mutual fund offers no tax benefits unless you opt for an Equity Linked savings Scheme (ELSS), which is a special sub-category of Mutual Funds with a lock-in period of at least 3 years. So, if you want liquidity from a mutual fund, you receive no tax benefits.

Keeping all these limitations in mind, many financial advisors, these days, prefer ULIPs to other investment plans.

Is ULIP Actually Better Than Other Investment Instruments?

Though both ULIPs and mutual funds are similar in term of investments, there is a world of difference between the two. ULIP scores over mutual funds in terms of returns and tax benefits. Sections 80C and 10(10D) of the Income Tax Act of India, 1961, allows all ULIP investors to enjoy tax benefits both on premiums and on the sum assured.

Moreover, ULIP is an investment plan that offers life insurance cover as well. So, in case of your unfortunate demise, before the completion of the policy term, the beneficiary selected by you would receive a lump sum assured as the death benefit. If you, on the other hand, survive till the maturity date of the policy, you will receive the fund value as the maturity benefit.

How ULIPs Work?

ULIP, as already discussed, is an insurance-cum-investment plan, which possesses all the best components of both the instruments. One part of the premium you pay is kept for the insurance and the other part gets invested in capital markets.

ULIPs allow you to diversify assets among various funds ranging from equities to debts. Hence, this kind of investment planning allows you to set your own investment strategy based on your risk appetite. It also permits you to freely switch your money from a high-risk fund to a low-risk one (and vice versa) according to market timings. ULIPs, therefore, are less risky as an investment plan

When you invest in a ULIP, few charges will be deducted at the time of entry. These charges include Policy administration charge, fund management charge, surrender charge, mortality charges, etc. Some of these charges are paid back to you as loyalty bonus, provided you stay invested for at least 10 years or more. When you invest in a ULIP product, your money gets locked for a period of 5 years and this actually helps you get a higher return in the long run.

Presently, most insurance companies offer two types of ULIP products. Type I ULIPs are those that offer either the fund value or the sum assured to the beneficiary. Under this type, the higher of the two (the fund value and the sum assured) is paid out as the death benefit. Type II ULIPs, on the other hand, are those that offer both the fund value and the sum assured as the death benefit.

Wrapping it Up!

ULIP is one of the best goal-based Long term insurance cum investment options. Though it used to be very expensive few years back, it has become quite affordable, nowadays. Now, a large number of insurers offer pocket-friendly ULIP products that help you meet your financial goals easily and in a relatively short tenure. HDFC Click2Invest Plan is one such example.

So, if you too have a long-term financial goal like saving for your retirement, or saving for the higher education of your child, and you simultaneously want absolute financial security for your family, ULIPs are the best bet for you.

 

Edition: December 2016

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