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  • How do Ulips work?
  • Types of ULIPs
  • Benefits of Investing in ULIP’s
  • Goal-Based Savings
  • Liquidity
  • Tax Benefits
  • Risks Associated With ULIPs
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What is ULIP?

Unit linked Insurance Plan, better known as ULIP is a type of life insurance plan that provides benefits of protection against risks and flexibility to manage your investments. Part of the premium paid by you goes towards providing the insurance cover and the balance is invested in types of instruments desired by the policy holder. These plans are most suitable for getting insurance and also growing your money.ULIPs work best when invested for a longer period of time with multiple investment options. The funds can be chosen by the customers depending on their risk appetite. The right balance of investment in equity and debt funds over a longer period of time can protect the customer from the ups and downs of the market.

ULIPs are very flexible – The policy holder has the option to partially withdraw money from his funds if required. The policy holder also gets the option to contribute extra money over and above his premiums to his investment corpus by way of Top-Ups.

Ulips are products that provide you a combination of a life insurance policy and also an investment opportunity though a mutual fund in a single plan. Ulips are provided by life insurers so your payments to these companies when you buy a Ulip plan are called ‘premiums’ as primarily Ulips are more similar to insurance plans.

A portion of your premium is diverted towards the investment bit, which is the mutual fund portion: equity, debt, hybrid or as the case may be. There are fund managers who look after your investments. You are also allowed to switch between different types of funds to make the best ulip plan for yourself.

The categorization of ulips depends on the type of mutual fund associated with the product. There can be roughly 3 kinds of Ulip funds:

Equity funds: Such Ulips invest most of its funds in equity or equity-oriented assets like stocks of various companies.

Debt funds: Ulip plans which invest the premiums in debt instruments or money market instruments, government securities, bonds and likewise.

Balanced funds: Here the premiums are invested in a combination of equity and debt market instruments.

4G or Whole Life Ulips: Few life insurers have floated new Ulip plans in the market which carry minimal charges and newer features. This has earned them the title of ‘new age ulips’, ‘whole life ulips’, or ‘4G ulips’. Some of the features of these new-age ULIPs include the removal of return on mortality charges (ROMC) on maturity and premium allocation charges. This category seeks to remove the negative bias against Ulips and increase awareness towards the new customer-centric changes.

ULIPs offers a high level of flexibility when it comes to choosing fund options, change in life cover, and option of riders. ULIPs give you the freedom to decide where you would like to invest your money and makes it easy for a policyholder to switch from one investment variant to the other as per the market conditions between equity, debt and balanced fund options.

Through top-ups, you can even increase your investment portfolio to make the most of investment opportunities due to any change in the markets. This way, you can actively monitor your investments and maximize your returns.

ULIPs are designed to address key long-term financial goals such as buying a house, funding your child’s education, buying a new car etc. as it helps you in building a sizeable corpus in a disciplined manner. Thanks to the power of compounding, ULIPs provide much higher rates of return. Moreover, when you invest for the long-term, it is possible to absorb the market risks as well as your money grows faster over a longer time horizon.

In case of emergencies or unforeseen future events, ULIPs allow you to partially withdraw money from your Unit Linked account, but only after a period of 5 years from the inception date. The best part about these withdrawals is that they provide tax benefits. Further, if you are looking for a loan against security, then you can use ULIPs to receive a certain percentage of the value of the fund, generally not exceeding 50 per cent, as a loan.

ULIPs offer not only provide life cover along with great returns but also provides you with dual tax benefits. For premiums paid, ULIPs are exempt up to Rs. 1,50,000 under section 80C of the Income Tax Act, 1961. Additionally, all payouts received at the time of maturity are exempt as well under Section 10(10D) of the Income Tax Act, 1961*

*Taxes are subject to change as per tax laws

The risk associated with Ulip plans will depend on the type of fund attached to it. For example, an equity fund is riskier than a debt fund while a balanced fund shares the risk between the mix of equity and debt portfolios. The Ulip plan will carry the risk factor accordingly. Ulips are also riskier when compared to other investments. For example, ELSS, which also falls under 80 C, is a more diversified investment and is less risky.

If you compare Ulips to a standalone insurance plan or a mutual fund product, then the former will carry greater risks. Here’s why. The cost structure of Ulips makes it expensive and it becomes difficult to get returns that will cover you for the costs and help you add extra over and above that. Considering that Ulips are more expensive, we can say that the risk factor is on the heavier side.

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