ULIP: Your Goal based Savings

ULIP is also popularly known as the goal based savings. It acts like the catalyst to fulfil significant goal projected savings and investment. It could as big or as small as child education, buying luxury goods, sponsoring house pay, etc. These saving options focus on timely and orderly investments.  It’s an insurance cum investment for better future planning. A policyholder can choose to either pay annually or monthly. A nominal amount is payable to secure one’s life insurance plan, so on and so forth. The residual amount is invested in the mutual fund plans.

The capital markets are linearly linked to the ULIP investments and estimated based on the numbers on board.

 

What is essentially a Unit Linked Insurance Plan?

A well packaged insurance plan which grants the privilege to earn returns from mutual channels too. It provides the risk cover and the opportunity to invest in any number of qualified investments such as stocks, bonds or mutual funds. A balanced mix of risk and reward has been put together to ensure protection part is taken care of, according to specific needs and choices.

Of course, the investments made are in tune with the capital markets, the risk factor is fully borne by the insurance policy holder. The investment needs to be made with the risk appetite and needs borne in mind.

Another important factor would be the future requirement of funds and what proportion to allocate into the unit linked investment options. All purposes can be served with these investment options. Brands like HDFC have a lot to offer with insurance cover and investment avenues. The primary focus being on retirement planning, physical and mental health, child education and marriage purposes.

Which category of investors should choose ULIP?

  • The ones who steadily want to check on their investments

Unit linked insurance plans provides the policyholders with the benefit to track their funds vigilantly. One is also allowed to change investment plans as and when required with varying risk-return profiles.

  • Individuals with a long term investment projection

ULIPs are well suited to individuals for comparatively longer span of time.

  • Individuals that changing risk parameters

Across the varying risk projections, the equity and debt ratio changes any moment. The equity component varies to a large extent from zero to a maximum of 100%.Hence, one can make an intelligent mix of investment funds starting from risk-averse investors to those investors who have a strong risk appetite.

  • Investors must lie within all life stages

ULIP (Unit linked investment) provides the flexibility for a set of varied plans depending on the various stages of the investor. This category offers plans depending upon the life stage you are in and the needs and financial pocket at a point.

How is the structure set-up done?

In the Unit Linked Plans (ULIP), the payable premium is put out in the investment funds picked up by you, deducting the allocation charges for managing funds, policy administration and insurance cover from the funds by nullifying a few units.

The exact value is arrived at by dividing the total value of the funds by the number of units.

Let’s quickly look at the highlighted advantages of Unit Linked Investment Plans:

  1. Market linked returns

Unit linked investments provide you that chance to be rewarded in return by investment in market linked units. The premiums get translated into market returns, Money is invested in different market instruments i.e. debt and equity instruments in varying degrees.

  1. Savings, Investment & Life Coverage- All in One

To reiterate, Unit linked plans have a lot to offer. It is a well packaged unit of savings, investment and life cover too. Therefore, there’s an opportunity to invest in market plans for higher returns. This type of investment also helps in promoting an improved habit of saving and investing which is critical for wealth accumulation over a longer span of time.

  1. Flexibility

Unit linked Investments have a wider scope for more flexible offerings. Following can be seen to be distinct as listed:

  • The choice to switch between the investment plans to match varying needs.
  • There’s the facility to back out from the investment funds, subject to changes of all sorts.
  • Option to add premium additions to enable additional investment in the ongoing plan (over and above the regular premium) subject to terms and conditions.

Servicing a Unit Linked Investment Plan

  • Single Premium

The policy holder is required to pay the entire amount in a shot at the beginning of the policy only.

  • Regular Premium over intervals (annually, semi-annually or monthly)

The policyholder has to make payments at pre-decided intervals i.e. annually, semiannually or monthly, depending upon the premium payment tenure.

  • of Paying Years

This purely will depend on the policy term that has been booked. Mostly, the policy term and the number of paying years are in perfect sync. Some term policies give the option to choose the number of paying years.

Different Category of Charges:

Charges

In the following way, the different charges can be categorized towards the cost of benefits and administration services:

  • Administration charges

A small fee is charged for administrating the individual policy on a monthly basis.  Administration charges can be significantly lowered with less number of units and cancelling a few unused ones.

  • Fund management charges

This charge is pertaining to the maintenance expenses for meeting overhauling of the fund. This is charged as a percentage of the fund value and is subtracted before arriving at the NAV (Net Asset Value) of the fund.

  • Switch charges

Switching between funds made easy now. One can switch often between investments to suit varied whims and fancies. In a year, a fixed number of changes can only be made possible and without any exorbitant charges. With the passage of time, every switch will be charged. These charges are subtracted by cancelling the unused units from the funds picked up by you.

  • Surrender charges

This is the charge for prior encashment of chosen units. It is charged as a percentage of the fund corpus and depends on tenure of the policy in the year of surrender.

  • Mortality Charges

Mortality is charged on the age, and amount of insurance cover, provided towards providing a death cover to the insured.

  • Premium Allocation Charge

This is levied based on the premium received and the years of the policy. A fixed percentage of the premium and usually a higher rate is charged in the initial years of a policy. This switch will eventually be a single or regular premium. Also the size of the premium, premium frequency and payment mode can vary.

  • Partial Withdrawal Charges

A big amount is certainly helpful where the fund after the lapse of three years of the policy term and is subjected to predetermined conditions. Also, these withdrawals are subjected to charges as well, as charted in respective policy document.

Switching Options:

Most funds under ULIP offer the option to switch between funds. This is a great opportunity for many you may want to switch between equity and debt funds, in times when there is market volatility or interest rate fluctuations. At times, changes in your financial standing, liabilities or risk profile may also require that you change your investments accordingly.

Withdrawals

Making withdrawals from the fund corpus can be certainly be felt difficult in most cases. One can withdraw money partially after a specific period of time. Again subject to a partial withdrawal charge. The withdrawal amount should be at least the lowest of the minimum prescribed withdrawal amount and the fund corpus must not fall below the minimum fund base.

The full amount of the policy can be withdrawn subject to the surrender charges as prescribed.

The brand new ULIP rules and regulations are improving customer value and perception. It’s just an improvisation to bring about changes in the scenario and make things more concrete from the functionality perspective. In the year 2010, IRDA came forward to streamline and introduce down tighter guidelines to in effect transparency in charges and capping of expensive trading per se.

 

Lastly the tax benefits of ULIP as under:

Tax Benefit

– Like insurance premiums and tax-saving mutual funds, ULIPs too offer a tax benefit up to Rs 1.5 lakh under Section 80C of Income Tax Act, 1961

– For ULIPs purchased before 01-Apr-12, premium should be less than 20% of sum assured, and less than 10% of the sum assured if purchased after 01-Apr-12

– Minimum lock-in period for ULIP is 5 years v/s 3 years in a tax saving mutual fund. Returns on maturity from ULIPs are tax free as well

– If the ULIP is surrendered before maturity, there are no tax benefits and previously claimed tax benefits will be reversed-

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