What is a ULIP ?
As the names suggests, these are policies issued wherein the death or survival benefit and surrender benefit are payable on the basis of sum assured or the value of units, which is dependent on the performance of its portfolio.
These policies have two components, expenses (including mortality) and savings like an endowment policy. The saving part is invested in a portfolio as chosen by the policy holder and the returns are based on the performance of such portfolio.
When you buy a ULIP, the insurance company invests a part of your premium in bonds or shares. The remaining amount is used to provide coverage. The policy holder is not involved with the tracking of the investment regularly, as it is taken care of by fund managers in the insurance company. It even enables a policy holder to change portfolios between debt and equity-based funds. ULIPs have a lock-in period of 5 years.
Benefits that are provided under the Unit Linked Insurance Plan.
- Insurance and savings: With this single plan, you get an insurance instrument as well as an investment tool. You will pay premiums for a single plan but get the benefits of an insurance plan and investment plan.
- Market-based returns: The ULIP allows you to invest in different market tools and thus allows you to earn interest based on the market. You can use the data of ULIP NAV to keep track of your investments.
- Death benefits: Like any other insurance policy, the ULIP generates death benefits at the demise of the policyholder. The value of the fund and other benefits that come coupled with the sum assured may vary based on the cause of the death.
- Maturity benefits: In case the policyholder survives the policy period, the insurance company will provide maturity benefits. Add-on benefits are offered as well based on the terms of the insurer.
- Long-term benefits: As the investment made under the ULIP is subject to market volatility, long-term tenures are proven to be a better option than short-term tenures. When you keep your money invested for the long run, you get more time to manage the market volatility.
- Tax Benefits: ULIP investments are eligible for tax benefits under section 80C and 10(10D) of the Indian Income Tax Act. You can avail tax exemption up to ₹ 1.50 Lakh as per section 80C. The maturity benefits generated under this plan are tax-free as well. However, if the sum assured is not 10 times the yearly premium, maturity benefits are taxed at a rate of 10% of the sum assured.
Categorization of ULIP by death benefits
Based on the death benefits, the ULIP plan can be divided into the following two.
- ULIP Type 1: The beneficiary receives the higher amount between the sum assured and the fund value.
- ULIP Type 2: The beneficiary receives the total amount of the sum assured and the fund value.
Categorization of ULIP by objective
The Unit Linked Insurance Plans are classified in the following four sections based on the objectives.
- Retirement ULIP: an insured pays the premiums during employment years and receive benefits in the form of annuities after retirement.
- Wealth collection ULIP: the premiums accumulate over the policy term and help in wealth generation.
- Child education ULIP: an insured pays the premiums and get the benefits in small amounts for the requirement of your children.
- Health benefit ULIP: in this plan, an insured can avail financial assistance during medical emergencies along with the common benefits.
Categorization on the basis of investment funds:
Following are the ULIPs based on fund choices and risk category
- Equity funds:
- These are high-risk ULIP scheme that invests majority of the premium into equity-based funds.
- Balanced funds:
- These are moderate risky ULIP schemes that invest the premium into balanced funds that strike a balance between debt instruments and equity.
- Debt funds:
- These are low-risk ULIP schemes that invest the premium majorly into debt funds that comprise of bonds and debt instruments.