What is ULIP Plan?
- Even if insurance cover is made for financial assistance after the undesirable event, few people think of insurance premium as an expense rather than an investment for dear ones. For such people, ULIP is the best suit.
- Unit Linked Insurance Plan (ULIP) is a combination of life insurance cover and investment. Millennials have now changed their focus from saving to investing. ULIP serves as the best solution for investment combined with life cover.
- Lately, people have realised that ULIP is the most flexible investment option available with sufficient market returns along with life cover. Let’s now drill into the varied benefits available from ULIP.
- Flexibility to switch: Yes, you read it correctly! ULIP allows switching from one fund to another easily. This helps you to take charge of your return profile, considering your risk appetite.
- Goal-based return: You can consider investing in debt-based funds or equity-based funds. If you have a short-term goal perspective, you should prefer debt-based funds.
- Risk perception: If your risk perception is low, you can prefer debt-based funds. If your risk perception is high, you have the option to go for equity-based funds.
- Returns: Lower risk would fetch you a lower return. However, the added feature is life cover and hence ULIP becomes an attractive investment vehicle.
- Expense ratio: As per IRDAI norms, there is a maximum bar on the expense ratio not to exceed 2.5% each year. The expense is normally very low and hence affordable to the public.
- Life Goals: You can customise the investment in ULIP as per your goals such as children education, marriage, higher studies, etc. Similarly, ULIP can help you plan for your retirement journey.
- Capital Appreciation: Capital appreciation can be in the short-term and long term. Long term capital appreciation is normally more fruitful. However, considering the volatility of the market observed post-Covid 2020, even short-term capital appreciation may be expected.
- Tax benefits: The premium paid on ULIP is available as a deduction under section 80C of the Income Tax Act, 1961. However, the maximum deduction allowed under this section is capped at Rs. 1.5 lakh. Returns from ULIP are normally tax-free. However, the gain derived from high-value ULIPs purchased after February 01, 2021, wherein the annual premium exceeds Rs. 2.5 lakh are taxable under capital gains.
- Optional Riders: Since ULIP is an insurance product, it allows adding additional riders by paying an extra premium. This helps increase the scope of ULIP along with life cover.
- Customisation: You can choose the suitable premium amount by selecting the term, sum assured, and payment frequency. Thus, you have the benefit of complete customisation.
- Life cover: Even if you are investing for a short duration, you would still get insurance cover. In case any undesirable event happens, the nominee will receive the benefits.
Types of ULIP
Each individual has own needs, expectations from the market and risk-taking capacity. Based on your needs, there are various types of ULIP. The different funds can be divided based on risk appetite and financial goals:
| Types | Meaning | Risk level | Return perspective |
| Cash funds | These are money market funds with ease of access and safe investment. | Low | Low |
| Income Funds | These are fixed-income funds wherein the contributions are invested in corporate bonds, debt funds and government securities. | Higher than cash funds | Moderate |
| Balanced funds | The fund invests the proceeds in equity as well as fixed-income funds. The objective is to ensure lower risk for the capital. | Medium-risk | Little higher than income funds |
| Equity funds | The fund invests only in equity investments. The capital appreciation is higher in the longer term. They are suitable only for long term investors. | High | High |
Which ULIP to Choose?
- Looking at your budget and financial goals, you choose the ULIP. If your objective is to earn short-term gains, you can set the sum assured, term, and premium payment terms accordingly. For short-term gains, debt-based ULIPs are best suited.
- Using the customisation feature, you can pay the premium that suits your budget. ULIP allows you to increase the premium amount as per your needs.
Conclusion
To answer what is ULIP plan in simpler terms, it is the only investment vehicle that offers benefits of life cover along with investment perspective. Thus, complete financial assistance is ensured during and after the tenure of the policy. Investment in ULIPs is hassle-free, online, and quick. As you get comfortable with the overall returns in the short-term segment, you may choose to continue for a long term.
