5 Reasons You Simply Cannot Avoid Unit Linked Insurance Plans

 

Unit linked insurance plans are a very good option and have become quite popular these days. The benefits are many, and it is perhaps a very important form of investment to think about. The first thing to understand is what exactly is an unit-linked insurance plan. Essentially when you invest in such a plan, the insurance company uses part of the premium in shares, bonds etc. The balance amount provides the insurance cover. Since insurance companies have on their payroll fund managers, the investor is spared the need of managing the investments. The experts within the company handle these for the investor. Depending on your instructions, the insurance company will deploy the funds. The great thing is that you can switch from ne form of investment to another if you so desire. However, keep in mind that the lock-in period is now 5 years. But in such investments, the benefits only accrue over a period of time.

Benefits of Unit Linked Insurance Plans.

The first benefit is that the plan offers a life cover. This is useful as the cover protects the investor in case of his untimely death. His family is protected financially. At the same time, the investment portion is working to generate money. 

The second benefit is Income Tax benefits. Under this plan, premiums paid are exempt from tax under Section 80C. In addition, the returns under the policy on maturity are also exempt from tax under Section 10 (10D) under the Income Tax act. There is thus a dual benefit. 

Financing long term goals is another advantage of this plan. If the goal is to buy a house after a certain time, this plan works to ensure that the funds are available and tax-free at that time. Therefore, investing in a unit-linked insurance plan is the best way forward. Considering the current interest rates being offered, investing in a fixed deposit with the bank does not bring good returns. The unit-linked insurance offers a larger return, although over a period of time. However, all investments generally yield results over a period of time. And the unit-linked insurance plan works in the same way. The planning for this needs to be a long term plan. It is possible to exit the plan after the lock-in period 5 years, but the gains are not as much as a longer time investment, say for 10 years minimum. 

Switching of investment instruments to be used by the insurance company is also a great benefit. Normally the insurance companies allow a number switches free of cost. You, as an investor, are free to ask the insurance company to switch the fund from equity to debt or vice versa. The company will act on your request. If you are someone who understands the market, this is extremely useful. However, insurance companies have god fund managers who handle such things. 

However, as for all investments, your personal goal is important. If your goal is wealth creation, then there is no better way than unit-linked insurance plans. The advantage is that it is possible to compare plans offered by different insurance companies and opt for the one which best suits you. Check the small print to see what sort of expenses are involved, premium payments, and the performance of this plan over the past. It is also necessary to investigate the kind of funds that the plan invests in and the kind of performance results these investments have given investors. This way, you can invest in the plan which you find suits your needs. The risk factor also needs to be examined before deciding to invest. 

Generally, unit-linked insurance funds are invested in the following manner - 

●      In Equity funds, the risk is higher, but returns are higher.

●      Balanced funds - in this case, the funds are divided between equity and debt markets to minimise the risk.

●      Debt funds - this investment carries a lower risk and is sometimes done at the request of the investor. Returns, however, are lower. 

However, there are 2 types of unit-linked insurance plans which must be understood. The first type pays the fund value upon the death of the investor, which is generally greater than the sum assured. The second type just pays the sum assured to the nominees. There is no added fund value. 

ULIP plan also have charges that must be considered when selecting the plan. There are Mortality Charges for the lif cover offered. And this charge depends on factors like age, sum assured etc. These charges are deducted on a monthly basis. Check to see what the size of the charge is.

 There is a fund management charge, which is essentially the charge that the company levies for management of the funds and is normally deducted before arriving at the NAV figure. 

Then there are the charges for switching the investment from debt to equity. Normally, some switching requests are free, but the company charges for each request after that.

 Partial withdrawals also attract charges. Therefore it is best to avoid such withdrawals if possible. 

The benefit of a unit-linked investment plan is that it offers a life cover and the advantage of growing your funds using the built-in investment system.

Ulips And Why They Make The Most Sense In Your Portfolio

As a new investor, you may want to try options that are low on risk but high on returns. The Unit Linked Insurance Plan (ULIP) is one such option, which is recommended for all investors wishing to build a balanced portfolio.

What is a ULIP plan?

A ULIP policy is an insurance product. It divides your payment towards it into two: One part pays the premium towards the policy, and the other is invested in high grade securities. The money keeps growing over a long period of time and creates a big corpus for the future. Since it is a life insurance product, it also helps your loved ones in your absence.

Why should I invest in a ULIP?

There are several reasons why you should invest in the best ULIP plan, such as:

* Suits all kinds of investors: The ULIP is aimed at all investors, whatever their appetite for risk. You can choose the securities you wish to invest in, which gives you flexibility to influence its outcome, and hence the outcome of your portfolio. If you are risk-averse, you can opt for balanced funds that divide your investment between equity and debt funds. If you have a higher risk appetite, you can choose equities which grow faster in a good market and lower risk over a longer time.

* There are no hidden charges: The ULIP policy does not have any hidden charges, as mandated by the IRDAI. As an investor, you are bound to pay processing charges and broker fees, and these are listed every time you make the next premium payment without any omissions. Thus, you know exactly what you are paying vis-à-vis the account performance. Besides, you get tax benefits on the ULIP premiums paid every year under Sec 80C of the Income Tax Act, 1961.

* Allows switching between funds as per market trends: Very few investment options in India offer the flexibility that ULIPs do. ULIP policies have few equals in terms of being able to switch between funds in the middle of the investment. If the market slows down, you can switch from debt to equity funds to minimise risk on the overall investment. Your investment manager can advise you on when to switch by monitoring the market closely. Most fund houses and insurers allow one free switch between funds every year, so you don’t lose any money on processing or switching charges. You get more opportunity to affect these switches on extending the ULIP term over 10 years to increase the corpus size.

* Grows money by compounding: You are free to exit the ULIP after the lock-in period of five years is over. By this time, you will have accumulated more money in the ULIP than you would by saving your money in a bank account or creating an FD. This happens with the power of compounding. However, it is advisable to stay the course and remain invested in the policy till it matures.