Investing in a product like ULIP which is a perfect combination of both is advisable as you will enjoy high returns, life cover and tax savings.
Aditya recently saw the mutual fund advertisements on television and decided to invest in them. During lunch, he mentioned the same to his colleague who advised him to invest in ULIPs instead. Now Aditya was confused and was looking for advice on the better choice. This is not the case with Aditya only but with many other young investors today. They want to know about ULIPs to take an informed decision.
ULIPs are Unit Linked Insurance Plans, and they work with the aim to multiply wealth along with protecting the loved ones in case of any mishap. Let us discuss some of the main things, which you as an investor should know about ULIPs. These will not only help you understand the product but will also help while investing in the same.
If you invest in ULIPs, you must know the costs involved. There are various expenses like administration charges, premium allocation charges, fund management charges and mortality charges.
Administrative costs are deducted every month from the premium paid. These costs are incurred on managing the ULIP. Premium allocation charges are the amount that is spent by the insurance company for distribution and marketing. In the initial years, these costs high and tend to reduce after the third policy year. Fund management charges vary between 0.5% to 2% usually and are charged to manage the investments. Lastly, mortality charges are the cost incurred on account of the life cover provided. This cost is not fixed and is dependent on the insured’s mortality rate.
Besides the above, the insured also needs to be fund switching charges which are levied if you request to change funds more than the allowed number of times. Apart from all the above, service tax is also deducted from the premium paid.
Options to Pay Premium
When you invest in ULIPs, you are offered three options for premium payment. You must carefully choose the kind that you are comfortable to manage. The three options are:
- Regular Payment: Under this option, you need to pay for the entire policy term.
- Limited Payment: In this option, you have the flexibility to choose the number of years you want to pay the premium for like 5 or 10.
- Single Payment: If you choose this, you have to pay the entire premium up front in one go.
For the first two options, you will further have an option to choose the frequency, which will be monthly, quarterly, half-yearly or annually. You must assess your ability to pay and then carefully select.
Risk Appetite of Investor
As an investor, the risk you will take while investing in ULIPs is similar to an investment in fixed/equities income securities or mutual funds. The policyholder needs to actively and regularly monitor the portfolio as he has to bear the full risk. Thus, as an investor, you must assess your financial commitments, risk appetite and funding needs and then carefully select a plan. ULIPs come with options for choosing funds, and your risk appetite should determine your choice. The options are:
- Conservative: Funds are invested in the money and debt market securities
- Aggressive: Funds are invested in equities
- Hybrid: Funds are invested in both money and debt market securities and equities
Under Section 80C you will eligible to get tax benefits up to the limit of Rs.150, 000 subject to the condition that the premium paid has to be less than the 10% sum assured. In case something happens to the insured, the amount received by the nominee will also be entirely tax-free. Also in the case of maturity of the policy, you get the higher of the fund value or the sum assured and this amount is also exempt u/s 10 (10D).
When buying a ULIP, you can decide how you want your funds to be allocated. However, it is possible that in due course of time; your preferences might change due to various factors. With ULIPs this is not an issue as you have the flexibility to modify the funds you have invested in. While buying a ULIP, you must thus, see the cost of switches and the number of free switches allowed in a policy year.
Though you can get good returns if you invest separately in mutual funds and life insurance, the challenge here becomes to balance the investments. Thus, investing in a product like ULIP which is a perfect combination of both is advisable as you will enjoy high returns, life cover and tax savings.