Unit Linked Insurance Plan (ULIP) is a fusion of insurance and investment. In ULIPs, part of the premium payment goes towards the sum assured (amount received at maturity in a life insurance policy) and the remaining is invested in your desired portfolio – equity, debt or a mixture of both, depending upon your risk appetite. The investment portion in ULIP is represented as units and is denoted as the Net Asset Value (NAV).
Do’s for investing in ULIPs:
Returns: Compare returns offered by various ULIP insurance policies and other financial instruments like mutual funds, bonds etc.
Credibility of the Insurer: Check carefully the life insurance companys credibility and analyze the past performance of all ULIP plans offered by that insurer.
Charges in ULIP: ULIPs being complex insurance products attract heavy premium allocation charge. According to new guidelines from IRDA effective 1st September 2010, the charges are to be evenly distributed over the lock in period of 5 years. The new rules have restricted the charges to an upper limit of 3% of the gross yield on ULIPs for 10 or less years; whereas the charges cannot exceed 2.25% on ULIPs with tenure of more than 10 years.
Switching Cost: Find out how many switches between funds are freely allowed during a year. Most insurers levy some fees in case the number of switches exceeds the permissible limit.
Partial Withdrawal Facility: Many ULIP insurance plans offer partial withdrawal facility. Find out about any restrictions on using this facility.
Lock-in Period: According to new IRDA rules, the minimum lock in period for ULIP plans has been extended up to 5 years from the existing 3 years.
Surrender Options: Check charges and deductions for surrendering the policy.
Merits of ULIPs:
Varied investment options.
Switching option depending on the market conditions.
Long term investment planning (ULIP is a long term financial investment planning instrument that helps plan for higher child education / marriage / retirement etc.)
ULIPs are covered under Section 80(C), 10 10(D) of IT Act. Hence tax benefits upto a maximum of Rs 100,000 investment can be claimed in these plans.)
Partial withdrawal facility (after the lock-in period).
Various payment options (Like single premium, regular premium payment which allows you to invest additional amount at your preference in the form of Top-ups. Top-up facility allows you to take the policy for the minimum premium, and once the policy renders good results, you can then top it up with extra premiums).
Demerits of ULIPs:
2)ULIPs are costlier when compared to traditional insurance policies, mutual funds etc, hence not advisable for short term investment purpose.
3)Min 5 year lock-in period makes it difficult to exit in case of non performance of the fund.
4)Premium allocation and other charges are quite high.
In insurance India market, ULIP is identified as an inventive product for investors looking at long term investment planning solutions to meet their financial goals.