India Insurance - Unit Linked Insurance Plan (ULIP)

Posted by ankita on December 3rd, 2016

In India, Unit Linked Insurance Policies (ULIPs) are insurance policies that combine risk coverage with investing in the stock/debt markets. In effect, they are designed to behave as normal insurance policies plus mutual funds.

An investor's contribution to ULIPs gets invested in specific types of portfolios that he/she chooses. The policy typically pays back based on market returns on investments at the end of the insured period. Therefore, it forms an interesting savings instrument that can get good risk cover.

Features of ULIPs include:

1. Units allotted under ULIP schemes have Net Asset Values (NAV) declared regularly, like a mutual fund

2. Investors can invest across types of portfolios similar to mutual funds - growth equity, balanced, debt funds, etc. Investors can move across portfolios, typically at nominal costs

3. Investors can invest as a lump sum (single premium) or make premium payments on an annual, half-yearly, quarterly or monthly basis. Premium amounts can be changed over the course of ULIP's life

4. Investments qualify under Section 80C of the Income Tax Act. Maturity proceeds from ULIP Policy are tax free. There are no long term capital gains tax and 10% short term capital gains tax on equity portfolios within ULIP. For debt funds, long term capital gains tax is 10% while short term is at the investor's marginal tax rate.

5. However, charges charged by insurance companies can be quite confusing - therefore, investors should compare them with similar mutual funds to see if charges quoted are reasonable.

Despite their interesting structure and potential benefits, investors are better off clearly understanding portfolio types offered, performance of fund managers and expenses/fees before investing in ULIPs.

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