ULIPs
ULIPs
A popular option for investors is through mutual funds. They are investment vehicles that pool the money of many investors and invest it in a way to optimize returns. They are market-linked products, and their function depends greatly on the ups and downs of the market.
The rise of mutual funds has led to the growing popularity of a similar market-linked product (not entirely though) and has captured the minds of early investors. These are the Unit-Linked Insurance Plans or (ULIPs).
What Are ULIPs? Arey They The Same As Mutual Funds?
ULIPs have a mix of insurance products coupled with investment products. ULIPs are considered as one of the best financial products for long term wealth creation along with life cover.
It’s quite simple — when you invest in a ULIP plan, you have to pay a premium. The asset management company (manager) then takes a part of that premium and invests it in company bonds, government bonds, shares, etc. The other part is used for a life cover that is part of your plan. This takes places in two parts —
1) The fund manager invests one portion of the invested amount towards equity, debt funds.
2) He invests the other portion of your money towards a life insurance product which ensures that your family/nominees get a hefty sum in case of your untimely death.
The fund managers save you from the hassle of tracking your investments and adjusting as the market changes. Furthermore, insurance companies approach investors to gather money for investment. Seems a lot like mutual funds, isn't it?
The Dual Dividend of ULIPs
ULIPs offer a dual benefit that attracts a lot of investors. They are well-designed financial products and offer a range of services. As one part of the premium goes towards life cover, it provides security to your family/nominees in case of policy holder’s untimely death. The other part, which is invested in the share market and fixed-income securities are a great medium to allow investment growth over a long period of time.
Insurance is a long term product, and with recent changes brought by IRDAI, it is mandatory for ULIPs to be part of lock-in periods. This period is anywhere from 3 years to 5 years. As an investor, the fruits of your investment always depend on — TIME. The longer you hold on to it, the better, bigger, and smarter your returns.
Furthermore, ULIPs allows great flexibility in terms of allowing investors to choose —
What plan to invest in and for how long?
To switch from one type of fund/plan to another without much hassle.
Advantages and Disadvantages of ULIPs
Finance Long Term Financial Goals
As iterated earlier, ULIP plans are best for long-term wealth creation. This wealth creation goal can be linked to any of the following —
For your joyous retirement years.
For supporting your child's elite college education.
For celebrating your child’s marriage.
As time plays a huge role in getting the best returns out of ULIPs, they reap the largest benefits when invested early and regularly.
Flexibility
ULIPs are smarty customized financial products and offer the ease of choice with the ability to switch portfolio plans between debt and equity-based financial products. These depend on the investors’ risk appetite as well as market performance.
Great returns and tax benefits
One of the lesser-known features of ULIP plans is that it is eligible for a tax deduction under Section 80C. Keeping in mind the returns of the policy, investors can avail tax benefits under Section 10(10D) of the Income-tax Act.
The Disadvantages —
High charges
ULIPs, although being financially sustainable products, bring with them a host of charges, particularly in the first five years of premium payment. These are charges under a wide range of names such as —
Premium Allocation Charge: Deducted as a fixed percentage from the premium paid in the initial years, and includes services like renewal expenses and intermediary commission expenses.
Fund Management Charge: This fee is imposed on fund management by the insurance company. It is deducted before arriving at the NAV figure, and the max charge cannot exceed 1.35 per cent per annum of the fund value and is charged daily.
Fund Switching Charge: While ULIPs offer great flexibility with fund switching, there are charges involved for the same. It can range from anything between Rs. 100 to Rs.250, depending on the company, policy, fund manager, etc. though the charges are levied only after a certain number of free switches per year.
Conclusion
If you are looking for a financial instrument that covers both insurance and investment, then look no further than ULIPs — They are best suited for individuals with a long term financial plan of wealth creation and insurance. Whereas mutual fund investors need a lot of risk appetite as the money can grow or shrink depending on market movements.
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