As an earning member of your family, you would want to invest in a life cover that helps your spouse, children, and parents financially in the unfortunate event of your demise. To grow your wealth and build a corpus that secures your family’s financial future, it will also be essential to put your money in various investment vehicles and earn good returns. To simplify your financial planning, you can invest in a ULIP scheme. Unit-Linked Insurance Plans, or ULIPs, offer you the benefit of both insurance and investment. The premium paid for ULIP is divided into two portions. One is predetermined for your life coverage, and the other is invested into your choice’s stock or debt fund.
ULIPs provide a flexible approach to financial planning. It allows you to safely balance your funds with debt and equity components. The returns on your investment depend on the performance of the funds chosen. At the same time, ULIPs help protect your life goals and your family’s financial future through life insurance coverage.
Key components of ULIP
The meaning of ULIP is better understood when you know how its two primary components work:
- The Insurance component of ULIP: Every ULIP is a life insurance policy at its core. ULIP insurance provides you with a life cover that is valid for the chosen policy term. This insurance coverage ensures that your family members get a much-needed financial safety net after your demise. The death benefit provided under such a policy would help your family to meet their daily expenses, pay off pending debts, fund essential life goals like paying college fees for your kid, and so on.
The death benefit payout from a ULIP is also eligible for tax benefits under section 10(10D) of the Income Tax Act, 1961. Hence, your family does not have to worry about paying taxes on the insurance money during an emotionally and financially turbulent time.
- The investment component of ULIP: As you buy a ULIP, you get the benefit of investing in a range of market-linked funds, like debt funds, equity funds or even a combination of the two. You may select which funds to invest in based on their market performance and your risk profile. For example, if you have a low-risk appetite, putting your money in debt funds will be better. On the other hand, if you want to grow your money faster and are open to a certain level of risk, then investing in equity funds under a ULIP scheme would be a wiser decision. At the same time, you can always invest in equity and debt funds for a more balanced portfolio.
The investment component under ULIPs is highly flexible. Such an investment option allows you to switch the funds you have initially invested in based on your evolving life goals and risk tolerance. ULIPs will allow you to freely switch funds during every policy year.
Important ULIP Terminologies You Must Know
The broad meaning of ULIP also encompasses some important terminologies related to such plans, such as:
- Sum Assured: The death benefit amount to be paid to your family under the ULIP if you were to pass away during the policy term.
- Lock-in period: The specific period during which you cannot exit the ULIP scheme. The lock-in period for ULIPs is 5 years.
- Policy Term: The policy period over which life insurance cover provided under the ULIP is valid.
- Fund Value: The total market value of all the units in the ULIP funds held by you. It basically refers to the monetary worth of your investments at any point in time.
- Partial Withdrawal: A ULIP facility that allows you to withdraw a portion of your investments during the policy term, but after the lock-in period. Usually, there is a predetermined limit on the sum you can withdraw, depending on the specifics of your investment.
- Premium Redirection: This ULIP feature helps you to determine how your future premiums shall be allocated between the ULIP funds. Based on the market cycles, you may opt to redirect your future premiums wholly or partially from one fund to another.
- ULIP Charges: This is the additional fee levied by the insurance company for diverse expenses incurred over the policy term, such as fund management charges, discontinuance charges, mortality charges, and more.
- Surrender Value: It is the amount that you receive from the insurance company if you surrender the ULIP prior to maturity.
Buying a ULIP can prove to be a prudent choice if you want to grow your savings through marked-linked funds while simultaneously making sure that your family is protected with adequate insurance coverage. Find the right ULIP scheme suited to your needs and invest in it today!
