What is ULIP Policy and how is it Beneficial?

Posted by amrina alshaikh on August 4th, 2019

A ULIP policy is a unit-linked insurance plan and it is a combination of both insurance and investment. A policyholder can pay either monthly or annual premiums in this case. A small portion of the premium goes to secure life insurance and the rest of the money is invested in mutual funds. The policyholder goes on investing for a period of 5, 10 or even 15 years to accumulate the units and one can invest in debt or equity, whichever one wants to, based on the risk appetite. For those who want to invest in ULIPs long term should go for equity-oriented fund option, which is also known as the growth options.

According to industry experts, the new ULIPs are better in comparison to the older ULIPs due to lower charges. One can pick and choose from the low-cost ULIPs. Traditional insurance only offers about 4% to 6% returns but the ULIPs will offer returns in double-digit figures if one has a higher risk appetitive and invests in equity funds. Moreover, before investing in ULIPs, one should have a thorough idea about the type of ULIPs they are investing in. In the case of Type 1 ULIP policy, the Sum Assured is paid to the nominee while in Type 2 ULIP, the Fund Value and Sum Assured are paid to the nominee in case of the demise of the policyholder. Also, whereas traditional investments do not have any charges, some charges like administration charges, mortality charges, and policy surrender or withdrawal charges are levied on the policyholder by the insurance provider.

Most ULIPs come with a lock-in period and the performance of the ULIP is based on NAV. So when the market is performing well and the policyholder feels that the returns are substantially high, they might lock the ULIP policy and the returns would be paid at the end of the term. Investing in ULIPs also enables a policyholder to enjoy tax benefits of up to Rs 1.5 lakhs under Section 80C of the IT Act. The maturity amount is also free from income tax provided the minimum death benefit is at least 10 times the annual premium. If this does not happen, the maturity amount will be subject to taxes and tax benefit under 80C is also capped at 10%.

Hence, those who want to increase their wealth can invest in equity funds, also known as growth funds. It is possible to get good returns from ULIP policy if one has moderate to high-risk appetite.