Insurance Blog

How ULIPs work?

266 0

Most financial decisions are taken with returns in mind. This mind-set has extended to the insurance sector too. There has been a shift of preference from the traditional insurance plans to ULIPs in recent times. The reason is dual coverage offered by it. But knowing that, what is ULIP?

Unit Linked Insurance Plan or ULIP is an insurance policy having an investment component. They offer a life cover like a traditional insurance product but also an opportunity to create wealth by investing in market-linked funds. This feature makes ULIP a unique preposition for different kinds of individuals seeking an adequate life cover and not losing on the opportunity of creating wealth. To summarise, ULIPs offer a higher value to investors than most other products.

Let us understand how does ULIP work

The basic fundamental of insurance how to monitor employees working from home  remains the same in case of ULIPs. The individual requires to make a periodic payment known as the premium to the insurance plan. Out of this premium, some part is allocated towards providing life coverage whereas a significant portion towards investment. This investment is in equity, debt funds or balanced funds. The investor has an option to select the fund in which investments are to be made. Not only that but also the investors can even switch between the different funds during the tenure of the unit-linked insurance plan. It is crucial to note that the returns the plan generates are based on market performance. ULIP charges a certain portion of your premiums towards premium allocation charges, administration charges, fund management charges, mortality charges, and more. ULIP charges are deducted at each premium, and the balance is invested in funds and allocated as an insurance component.

ULIPs being complex in nature are difficult to compare prima facie. For that, you can use a ULIP return calculator to estimate the future value of the fund. It can also help in making informed decisions with regards to investment in the various funds. Using a ULIP return calculator can help in strategizing your investment portfolio according to your financial goals and risk appetite. Most insurers provide access to this free-tool that can come handy before analysing your ULIP plans returns and selecting the right one for you.

There are triple benefits derived from investing in a ULIP. Let us look at the advantages-

Insurance

The essential nature of a ULIP is that of an insurance policy. The insurance cover is expressed as a percentage or in multiple of the premium amounts. ULIPs have a death benefit for the life cover. The amount which the insured is paid is higher of the sum assured or the value of the fund. This extensive insurance cover makes it convenient to financially secure from the risks of an unfortunate demise.

Financial Goals

Apart from being an insurance plan, ULIPs aim to fulfil your financial goals by contributing to wealth creation. It is done through investment in different funds like in case of a mutual fund. The investor can select from the range of funds offered by the insurer and invest according to their need, risk appetite and time horizon. As ULIPs have a compulsory lock-in for 5 years, they are more or less a long term financial product. Investment in a ULIP can witness the power of compounding to generate significant returns at maturity.

Tax Benefits

The premiums paid towards a unit-linked insurance plan is eligible for a tax deduction under Section 80C. You can avail a maximum deduction of ₹1,50,000 towards the cost of premiums for such plans. Not only premiums but also the maturity amount paid at the end of the policy tenure is exempt from tax under Section 10(10D). This exemption makes the entire income earned from the plan as pure gain to the investor.

Apart from the above, the switching mechanism available for the investor is a highlight of unit-linked insurance plans. As market scenarios change, so does the risk appetite of the investor. Moreover, it is also influenced by the time horizon to financial goals. These features make investing in ULIP an optimal solution to earning while protecting yourself with an insurance cover. Make sure you compare the various top performing ULIP funds depending on your financial goal before buying the perfect life cover and investment plan.