Contents
- Overview on ULIP Returns
- Understanding Unit Linked Insurance Plans (ULIP)
- ULIP Returns Investments
- Why you should invest in ULIPs?
- Benefits of ULIP returns
- Market-linked Returns
- Investment and Insurance Benefits for ULIP returns
- Death Benefits
- Maturity Benefits
- Tax Benefits
- Long-term Investment Benefits
- Withdrawal Benefits
- How do ULIPs work?
- conclusion
Overview on ULIP Returns
ULIP returns stand for unit-linked insurance plans. ULIP is a combination of insurance and investment. Here policyholders can pay a premium monthly or annually. A small amount of the premium goes to secure life insurance and the rest of the money is invested just like a mutual fund does. Policyholder works on investing through the term of the policy – 5,10 or 15 years and collects the units. ULIP offers investors options that invest in equity and debt. An aggressive investor can choose equity oriented fund option whereas a stable one can go with the debt fund option. “If you have a long term ULIP, choose the equity-oriented fund option – which is known as growth option,” says Deepak Yohannan, CEO of myinsuranceclub.com.
He further points out that the recently launched ULIP is better than the older ULIP due to lower charges. One can pick and choose the low-cost ULIP. While traditional insurance plans give 4% to 6% returns, ULIP can allow you double-digit returns if you are invested in equity funds, states Deepak Yohannan.
Unit Linked Insurance Plan (ULIP) is a mix of insurance along with investment. From a ULIP, the goal is to render wealth creation along with life cover where the insurance company sets a portion of your investment towards life insurance. And remaining into a fund that is based on equity or debt or both and matches with your long-term goals. These aims could be retirement planning, children’s education or another significant event you may wish to save for.
Understanding Unit Linked Insurance Plans (ULIP)
A unit-linked insurance plan can be utilized for various benefit payouts including life insurance, retirement, education and more. A ULIP offers varying provisions to the investor as benefits. A ULIP is typically opened by an investor seeking to provide coverage for beneficiaries. It is paid into by the owner in the form of premiums, with the purpose of the plan’s worth to be paid out at a defined time frame for a definite purpose. With a life insurance ULIP, the beneficiary would get payments following the owner’s death. Plans can include modifying provisions for triggering payments.
A unit-linked insurance plan’s investment decisions are structured related to a mutual fund. The assets in a ULIP vehicle are managed to a specified objective. The vehicle calculates a daily net asset value. The vehicle is market-linked and appreciates with rising share value. When an investor purchases units in a ULIP, he or she is purchasing units along with a higher number of investors. Just like an investor would buy units in a mutual fund. Different ULIPs offer various qualified investments. Investors can purchase shares in a particular strategy or expand their investments across multiple market-linked ULIP funds.
ULIPs requires a premium. Premiums vary with the terms of each ULIP. A primary lump sum is typically required along with annual, semi-annual or monthly premium payments. Premium payments are proportionally invested towards particular coverage and in the selected investments.
Unit linked insurance plan investors can create changes to their fund preferences throughout their investment. The funds offer to transfer flexibility. Numerous investment opportunities are also available including stock funds, bond funds, and diversified funds.
ULIP Returns Investments
ULIP investment offerings are primarily concentrated in India where they were first launched. HDFC Life is a leading provider of ULIP investments. The firm’s plans offer varying provisions, terms and investment options. Other ULIP providers include Aegon Life, PNB MetLife, Kotak Life, ICICI, IndiaFirst, SBI Life and IDBI Federal.
Why you should invest in ULIPs?
- Life cover: First and foremost, with ULIPs you get a life cover coupled with the investment plan. It offers security that a taxpayer’s family can fall back on in case of difficulties like the unfortunate death of the taxpayer, etc.
- Income tax benefits: Not many are aware that the premium paid towards a ULIP is suitable for a tax reduction under Section 80C. Additionally, the returns out of the policy on maturity are excluded from income tax under Section 10(10D) of the Income-tax Act. This is a dual advantage that you can claim with this policy.
- Finance Long Term Goals: If you have long-term goals like purchasing a house, a new car, marriage, etc., then ULIP is a great investment option because the money gets compounded. As a result, the net returns are usually higher. This stands true even if you want to exit after the 5 year lock-in period in relation to not having invested the amount at all and retaining it in a savings account or in the form of an FD. But, under ULIP, the mantra is to always keep the policy going for a longer time horizon to reap the best out of it.
- The flexibility of a portfolio switch: As already mentioned, ULIPS are usually designed in a way that they allow you to switch your portfolio between debt and equity-based on your risk desire as well as your knowledge of how the market is functioning. Insurance companies, on the other hand, provide very few numbers of switches free of cost.
Benefits of ULIP returns
A ULIP plan comes loaded with a host of benefits for its investors. Here’s a rundown on the different benefits of ULIPs:
Market-linked Returns
A ULIP plan presents an opportunity to earn market-linked returns. A part of the premium paid in a Unit Linked Insurance Plan is invested in funds, which invest in different market instruments including debt and equity in varying proportions. The policyholder stands a chance to earn returns based on the market. Investors can use the data such as the NAV to keep a tab on returns and ensure they stay invested in the best ULIP plans.
Investment and Insurance Benefits for ULIP returns
Unit Linked Insurance Plan offers the triple benefits of investment, life cover, and tax savings. Meaning that the investor gets to benefit from a comprehensive life cover based on his/her preferences and budget and reap market-linked returns on his/her investment.
Death Benefits
A unit-linked plan offers death benefits in case of the death of the insured during the policy term. While the death benefits are catered to as SA together with the value of the fund, benefits may differ based on the cause of the demise of the insured.
Maturity Benefits
A ULIP plan also comes packed with maturity benefits in case the policyholder endures the maturity period of the plan. Usually, maturity benefits are catered to the insured as the sum of the value of the fund. Nevertheless, some insurance companies may cater to add-on benefits based on the terms and conditions.
Tax Benefits
On top of the insurance and investment benefits, Unit Linked Insurance Plan also offers tax exemption benefits for a maximum of Rs. 1.5 Lakh u/s 80C of the IT Act, 1961. Moreover, the maturity benefits of ULIPs are also tax-free. Nevertheless, there is a forewarning. The minimum Sum Assured or the Death Benefit should be at a minimal of 10 times of the annual premium. If the given this is not the case, the tax benefits are covered at 10% of the SA and its Maturity Benefits are not tax-free.
Long-term Investment Benefits
A ULIP plan is one of the most sought-after investment instruments for the ones who are seeking to earn maximum returns on the investments they make in the long-term. It is vital to understand that market volatility and fluctuations may have an impact on the returns in the short-term. Instead, keeping the investment for a longer period makes it easy for the investors to deal with the market volatility and earn a high rate of return on the investment. A unit-linked insurance plan allows for long-term investments and makes it simpler for the investors to reap the maximum returns on the investments.
Withdrawal Benefits
A unit-linked insurance plan comes handy in such situations. A ULIP plan allows its investors to withdraw a portion of the investments in case of an emergency, after the completion of a pre-determined timeline. Generally, such withdrawals are tax-free.
How do ULIPs work?
In unit-linked plans, one share of the paid premium towards the plan goes towards ensuring the life cover for the policyholder, whereas the other share of the paid premium is invested in various types of fund options. The investors can choose the fund options basis their wealth creation goals and risk appetite. In the event of the untimely and unfortunate demise of the policyholder, the nominated beneficiaries will be given the insurance and/or the fund value, whichever is higher, based on the type of unit-linked insurance plan.
Much like the mutual funds, the insurance company will give the ‘Units’ basis the proportion of the investor’s money invested in the market. This unit is the representation of the investment and is allocated a NAV that is evaluated and declared daily.
In order to understand the working of these plans, here’s an example:
Akash, a 30-year-old man, invests in a unit-linked insurance plan with a yearly premium of Rs. 50,000 for a period of 20 years. The policy essentials would be:
Policy Details:
Initial Sum Assured = Rs. 5,00,000 (yearly premium x 10)
Annual Administration and other charges = Rs. 2500
Total Annual Investment = Rs. 47,500
Initial NAV Value = Rs. 10
Units purchased = (47500/10) = 4750
ULIP Returns:
| Death Benefits | Maturity Benefits |
|---|---|
| Payment made to the nominee if Akash dies within the policy term = Rs. 5,00,000 (Sum Assured) or the Fund Value (whichever is higher) | Payment made at the time of maturity if Akash is alive, which will be the Fund Value. |
conclusion
These Ulip funds have given the highest returns in their categories. While returns factor in fund management charges, Ulips also come with premium allocation, policy administration and mortality charges that eat into final returns.
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