Ch. 3: ULIP Plan Benefits

If you’re the primary breadwinner of your family, you need to earn and save money to take care of your family’s current and future financial needs. But, as you already must know, costs are rising each day - from higher education to marriage expenses to basic living expenses.

Given these increasing costs, just working hard may not prove to be enough! Your money needs to ‘work hard’ as well to beat inflation. And so, you should explore investment avenues that have a long-term potential to grow beyond it. A ULIP is one such financial instrument that encourages long term investment and promises inflation-beating returns.

It is an investment product that offers you a variety of fund options to invest in, depending on your goals and risk appetite to achieve your financial goals. Along with the investment, it also provides you with a certain fixed amount of life insurance cover.

In the preceding article, we discussed why you should consider investing in a ULIP. Now, let’s have a look at the various benefits it offers!

The money you commit to invest in a ULIP for the long term is pooled across multiple investors and invested in the stock market by a professional fund manager who is specialised in analysing, evaluating, investing, and extracting maximum returns from various investment instruments. You are basically putting an expert on the job, instead of trying to educate yourself about the markets and then spending time in buying and selling stock to generate benchmark or inflation-beating returns.

There are various situations where you need to switch your funds -

• Market movement -
  Market conditions influence fund performance. So say if the market is not performing as well as you had expected, you can instantly switch your investment fully or partially between fund options.
• Change in Lifestage -
  Similarly, depending on your life stage you can switch your funds. For instance, you can maintain an aggressive position (high on equity) while you are young and earning well, and shift to a conservative position when you hit, say, 50.

The best part about switching in ULIPs is its tax efficiency. You can simply login to your insurer’s website and in a few clicks instantly move the fund, without attracting any tax, whatsoever.

You will find the detailed procedure in here - Fund Switching in ULIP.

The insurance provider will be completely transparent with you about the ULIP you purchase. They will provide you with the complete details about the charges levied, the different funds in which your money is invested, the value of your investment and expected rate of returns, past performance of the funds, etc. Hence, when you are clear about what you are investing in, you can make a well-informed choice.

In case of your unfortunate demise, your nominee will receive a death benefit. It varies across policies, but is generally of two types -

• Either the sum assured or the fund value - whichever is higher
• The sum assured, plus the fund value

You can avail tax benefits* during three stages -

• Investment: Under Section 80C of the Indian Income Tax Act, the premium you pay for ULIP is eligible for tax deduction up to Rs. 1.5 lakhs in a financial year.
• Withdrawals: After the lock-in period (5 years), if you withdraw your funds from ULIP, the entire amount is tax-free.
• Returns: Under Section 10D of the Income Tax Act, the Maturity Benefit you receive at the end of policy tenure is fully exempted from tax. The amount received by your nominee (Death Benefit), in case of your unfortunate demise, is also exempted under Section 10 (10D) # of the Income Tax Act.

When you invest in ULIP, you can choose where you want to invest, based on your return expectations and risk appetite. It offers a host of high, medium, and low risk investment options.

• If you are a risk-taking person, you can invest in equity-oriented funds. Here, the premium you pay is invested in the equity or stock market. Though they are extremely volatile, the funds offer you a really high return over an investment period. You can choose among large cap, mid-cap, or small cap funds.
• If you want to avoid risks yet make an investment, debt-oriented funds are for you. Here, the premium is invested in debt instruments, like - corporate bonds, government securities, and other low-risk investment tools. With a lower risk, you may get a comparatively lower return.
• You can also choose a money market fund if you are looking for a short-term and highly liquid investment. It is a type of a debt fund that invests money in short-term money market instruments like commercial papers, bank deposits, treasury bills, etc.
• If you want to play it safer and get steady returns, you can go for a balanced fund. As the name suggests, it is the most stable amongst all. Here, the funds are hybrid in nature as they invest your premium in both stock and debt markets, so you can earn balanced returns.

To know more about how funds work, refer to our article - Concept of Funds and NAVs.

Under ULIP, you can make partial withdrawals from your yet-to-mature policy. This can be done after a lock-in period of 5 years. To be financially protected in case of any emergency, you can withdraw specific amounts of money from the fund value multiple times during the policy tenure.

Refer to our article on Partial Withdrawals to understand the intricacies even better.

As you can see, there are a lot of reasons to purchase a Unit Linked Insurance Plan. Your investment choice will depend on several factors, like - your risk-bearing capacity, age, investment horizon, and financial goals. So take out some time, understand your needs and requirements, and see if ULIP’s features align with them. We hope you make a wise choice for yourself.

But, first, you should decide the type of ULIP you need. Read the next article to find out!