Unit Linked Insurance Plan (ULIP) is a multifarious insurance product, which is a life insurance and investment plan in one. As a policyholder, you must make regular premium payments, a portion of which is used to provide life insurance coverage. The rest is combined with funds received from other policyholders and invested in financial instruments—debt, equity, or a combination of both.
Benefits of ULIPs
ULIPs allow you to indirectly invest in a variety of market-related instruments, including equities, debt, and balanced funds, to earn long-term investment returns. Depending on your risk level and investing objectives, you can invest in a range of fund types.
You may also use a ULIP calculator to get an estimate of the premium you’ll have to pay and the amount of coverage you’ll get. Here are some more benefits of ULIPs:
1. You get market-linked returns
ULIPs allow investors to allocate a portion of the premium to market-linked securities, such as debt and equity instruments (in varying proportions), to receive market-linked returns.
2. Life insurance with savings
Considering the pandemic situation we are in, getting a life insurance policy is a wise decision for the protection of yourself and your family. With the necessity for protection against life’s unforeseen events taken care of, you may create a regular saving and investing habit and accumulate significant wealth over time.
3. Flexibility in decision-making
ULIPs provide a variety of high-, medium-, and low-risk investing possibilities through various funds within the same plan. You can select a suitable plan based on your risk tolerance. ULIPs give you the option of choosing the sum assured or premium based on your needs.
4. Tax benefit
Not many people are aware, but a tax deduction is available for premiums paid to a ULIP under Section 80C. Moreover, under Section 10(10D) of the Income Tax Act, the returns from the policy upon maturity are tax-free. This coverage has a twofold benefit that you can take advantage of. However, as of Budget 2021, if your new ULIP investment’s yearly premium exceeds Rs. 2.5 lakh, the return you receive would no longer be tax-free. The new taxation law will only apply to new ULIPs, so you won’t have to be concerned about your existing ULIPs where you can continue your premium investments until the policy matures.
5. Long-term benefits
Be it your retirement goals, traveling when you’re old, or children’s higher education; ULIPs can help you create a major corpus to ace your future dreams.
Don’t hamper your long-term goals by surrendering your ULIP. Below are the reasons you should not surrender your ULIP plan as per various stages:
1. Surrendering during the lock-in period
The ULIP lock-in period is of 5 years, but investors can surrender the policy before the lock-in period ends. Once you file a surrender request, the risk coverage will expire; however, the surrender value will be paid only at the end of five years. Another essential factor to consider is that the investor is not compensated for the value of the fund as of the surrender date. Multiple deductions apply to the pay-out made after the lock-in period. Certain discontinuance charges are assessed when you apply to surrender your insurance. All tax deductions claimed against ULIPs will be accounted for as income and taxed according to your tax slab if you surrender your policy early. Tax Deducted at Source will also apply to the surrender value.
2. Surrendering after completion of lock-in period
The premium allocation charge is collected from the premium before it is invested in a ULIP. Various fees are deducted by canceling units or modifying the NAV. The deduction is larger in the first year and thereafter gradually decreases. This means in the later years of the plan, the deductions are less. So, if you surrender the plan now you will not get real benefits and the return will be low.
While there are no departure fees after the lock-in period, surrendering your plan is not recommended. Staying invested for a long period of time, such as 15–20 years, allows you to benefit from market regularisation while also distributing mortality, fund management, administrative, and other expenses across the policy’s tenor.
Make your money work for you; invest in a good ULIP plan for the benefit of your family. Achieve your long-term life goals by getting a protection cover and an investment plan altogether.