Robert DesauzaLife insurance has become a necessity in today’s times. Life is often unpredictable and having a financial safety cushion for your family is extremely important.
There are many types of life insurance policies available in the market for you to choose from. A regular life insurance policy will give you a life cover and it also has a savings element included which could give you interest for the money you invest.
For people who prefer low premium amounts, there is term insurance that has very low premiums because of its lack of investment of savings options.
But what about people who want to make use of the market growth rather than receiving a fixed sum every month? They could consider buying an ULIP policy.
ULIPs or unit-linked insurance policies come with an investment element along with your regular life insurance. That means, a part of the premium you pay goes for your life cover and the rest will be invested in a fund.
You have the liberty to choose a fund according to your investment goals and risk appetite. Like just in a mutual fund, there will be a fund manager who will manage and invest money according to the theme of the fund.
ULIPs are becoming more and more popular because of their investment part. Market investments are considered to be able to beat inflation even if the fund performs well. If you are interested to buy ULIPs there are certain important things that you should keep in mind. Let’s take a look at some of them.
- Choosing the right fund is important – Choosing a fund in ULIPs are as important as choosing the mutual fund or stocks to invest in. The profit you make through ULIP is decided by the performance of the fund. It is also important to make sure the fund chosen matches your investment horizon and risk appetite.
Broadly, the funds available to choose in different types of ULIPs can be classifieds into three.
- Equity funds – They invest mostly in equities and have a higher scope of returns but come with higher risk as well.
- Debt funds – They mostly invest in stable income funds like government and corporate bonds, and they tend to give lower yet steady profit.
- Balanced funds – They try to strike a balance between equities and debts. They are also more dynamic, and the portfolio could keep changing according to the market conditions.
- Understanding that ULIP could also make you losses- Many invest in ULIPs thinking that profit is guaranteed. This is not always true. ULIPs are market linked and according to market movements, it could make you losses as well. In fact, ULIP funds work exactly like mutual funds and all opportunities and nuances associated with mutual funds exists here too.
- ULIPs have a lock-in period – Insurance policies are meant for a longer period of time and so does ULIP. To promote a longer subscription, ULIPs come with a five-year lock-in period. After five years, you can partially or fully withdraw from the ULIP plan.
- ULIPs are flexible – ULIP plans tend to be really flexibility and that flexibility extends to payment of premiums as well. ULIPs offer you to pay the premium in one ago as a lump sum, as parts throughout the course of the plan or split into three or four years.
Fund selection is also flexible when it comes to ULIPs. If your fund is underperforming, you are in no way stuck with it. ULIPs allow switching of funds for free for a limited number of times and after that, with a nominal fee.
- ULIPs help save tax – ULIP plans are tax deductible under Section 80C of India’s income tax act of 1961. That means, premiums up to Rs.1 lakh is tax free. Not only that, but the amount at maturity is also completely tax-free under Section 10 (10D) of the Income Tax Act of 1961.
ULIPs are a proven investment cum insurance option. If you are planning to buy one, getting advisory could help you choose a fund that is in accordance with your goals.
Robert Desauza
Clare Louise
Paul Watson