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Investing In Ulip’s – Is It A Good Idea?
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Unit Linked Insurance Plans (ULIP) are the integrated products that offer the benefits of both insurance and investment. This is the single financial product that gives the dual advantage of life coverage with choice of investments that you do based on your risk appetite. For a long term investment goal, ULIP comes handy and while part of the premium is directed towards continuation of life insurance component, the major part of payment is used for investment. The flexibility to select the frequency of paying the premium, deciding the policy terms and the choice of funds to invest make ULIP a popular financial product.
Reasons to Invest in ULIP
- Life Coverage – This is one of the two major components of ULIP where the policy holder gets life insurance coverage. Though it is not as extensive as the sole ‘life insurance’ policy, it gives the benefits of lump sum payment to the beneficiary in case of untimely death of the policy holder.
- A range of investment options to choose from – Based on the risk you can take, there are various investment options available like equity funds, debt funds, balanced funds and other investment instruments. In the long term, say for 20 years period, a decent return of around 8 to 15% can be expected based on the fund you choose. Many ULIP policies have the option to switch funds free of cost from few times to several times a year. This gives the flexibility to change the risk ratio as per the requirements of the policy holder. A ULIP policy comes handy as a retirement corpus, for wealth creation, for education of the children or for sudden requirements like health related expenses.
- Flexibility of Features -- Some ULIP policies allow to change the life cover. As people grow old, the life cover could be changed based on the income and liabilities. Also there is a flexibility to choose the term of the policy and the frequency of premium payment. Certain companies allow top up to invest more which in turn increases the possibility of the returns on the investment. Also certain riders like critical illness, disability or accident cover riders can be opted by the policy holder to enhance their base policy and for additional benefits.
- Tax Benefits – You can enjoy tax benefits under Section 80C for the premiums paid for your ULIP. The earnings from the funds are exempted from tax payment. Moreover, the maturity amount is exempted from tax under Section 10D of Income Tax Act India, 1961.
- Transparency of Investment -- One can select the funds to invest as well as the fund allocation. And the performance of funds could be tracked through the insurance company’s website.
- Low charges – A ULIP policy incurs different type of charges. These include: administrative charges for the policy, premium allocation charges, mortality charges, surrender charges, fund switching charges, discontinuity charges and fund management charges. On the other hand, these charges reduce gradually. In the year 2010, IRDAI put a cap on the annual charges for ULIPs within 2.25%. Insurance companies reduced the commissions and service charges and as a result, several ULIPs became more cost effective than mutual funds at present. On long term ULIP policies, insurance companies offer loyalty bonus which adds to the return.
Different ULIP policies are offered by different insurers. Some policies give (1) the higher of the fund value or sum assured in case of death of policy holder, while other policies give (2) the total amount of sum assured plus the fund value. There will be a difference in premium and other terms and conditions for different types of ULIPs. It is a good practice to compare policies offered by different insurers and go for the one that best suits your financial health, investment goals and risk appetite. Considering all these aspects, it is a good idea to invest in a ULIP product that will cover various financial requirements for you and your family. Many companies offer ULIP policies online wherein you do not need to contact any insurance agent. This offers a very easy way to purchase a policy at the comfort of your home. Therefore, investing in a ULIP certainly makes sense!
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