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Understanding ULIPs: A Comprehensive Guide

TeamAckoSept 25, 2024

ULIPs offer policyholders the flexibility to choose the level of life insurance coverage they want and the type of investments they want to make. They also provide tax benefits under certain conditions. In this article, we unravel the intricacies of ULIPs: their benefits, various types, and how they function. Read on to learn more about this unique blend of protection and wealth creation that could be just what you need to secure your financial future

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Contents

What is a Unit Linked Insurance Plan (ULIP)?
7 Reasons Why You Should Invest in ULIPs
Who should invest in a ULIP?
- 5 Types of ULIPs
Unit Linked Insurance Plan Cash Value Growth
ULIP vs ACKO Life Flexi Term Plan
About ACKO Life Flexi Term Plan
Determine Which Policy Works For You
3 Different Types of ULIP Charges
Tips for Buying ULIP Plans
Additional Riders Available
Choosing the Right Unit-Linked Insurance Plan
Factors Affecting Unit Linked Insurance Plan
Fund Selection and Investment Options: ULIP plans
About withdrawing funds from ULIPs
Wrapping Up
Frequently Asked Question

Advantages	Disadvantages
Dual Benefits: The policyholder can invest their money in various funds while protecting their family's financial future with life coverage.	Complexity: As a single ULIP serves as both a life insurance policy and an investment, inexperienced policyholders may need help understanding.
Flexibility: Policyholders can select funds based on risk tolerance and future financial objectives.	Costs: ULIPs are typically connected with a high number of charges.
Tax Benefits: ULIPs come with tax benefits under certain conditions.	Lock-in period: 5-year lock-in period during which you cannot withdraw your assets.

What is a Unit Linked Insurance Plan (ULIP)?

A Unit Linked Insurance Plan (ULIP) is a multi-faceted life insurance policy that offers life coverage and investment options in equities or bonds, catering to long-term financial needs. In ULIP, you pick where to invest based on how much risk you're comfortable with. The returns you get depend on how well your chosen fund performs.

7 Reasons Why You Should Invest in ULIPs

Here are the top 7 reasons why you should invest in ULIPs.

Financial protection and investment opportunities: ULIPs offer the unique benefit of providing life insurance coverage and investment opportunities, making them an ideal choice for long-term financial growth and protection.

Customisation: ULIPs provide investors with flexibility, allowing them to choose from various fund options based on their risk appetite and financial goals. They can switch between equity and debt funds during the policy term without additional charges.

Premium payment flexibility: ULIPs allow investors to customise their premium payment frequency, making it easier for individuals with varying income sources to contribute regularly towards wealth creation.

Wealth creation: ULIPs offer potential for wealth creation by investing in market-linked instruments like equity, balanced, or debt funds. This allows policyholders to accumulate savings while maintaining life insurance coverage. With various investment options and competent fund managers, ULIPs strategically allocate investments for maximum returns and risk exposure. Lock-in periods encourage disciplined investing, while tax benefits contribute to capital appreciation and assured protection against unforeseen circumstances.

Life insurance coverage: ULIPs offer life insurance coverage and investment opportunities. The amount of coverage depends on the policy terms and premium payments agreed upon when buying the plan. ULIPs provide peace of mind by offering substantial life insurance coverage simultaneously.

Flexibility in investment options: ULIPs offer a wide range of fund options managed by experienced fund managers, allowing investors to choose funds based on their financial goals, risk appetite, and investment horizon. They also provide top-up options to boost investments and increase life cover.

Tax benefits: ULIPs offer tax benefits under Section 80C of the Income Tax Act, with annual deductions of up to INR 1.5 lakh. Additionally, maturity proceeds are tax-free under Section 10(10D), providing investors significant savings throughout the investment period.

Note: Tax benefits under ULIPs might not be available under the new tax regime.

ULIPs offer flexibility in premium payments and lock-in periods, ranging from 5 to 15 years or more, providing investors with the necessary liquidity to adjust investments according to market conditions. Systematic investing via ULIPs could be a viable option for investors with long-term goals.

Who should invest in a ULIP?

ULIPs are suitable for anyone looking for long-term financial goals, with flexible options that cater to people from all walks of life.

They are ideal for those looking to create wealth or ensure financial security for their loved ones.

Tax benefits and varying lock-in periods make them perfect for people who want to invest for different lengths of time.

ULIPs can be an excellent option for those who want to build savings for retirement or higher education. There is no one-size-fits-all answer to determine whether someone is a good candidate for investing in ULIPs.

Factors such as age, risk appetite and financial goals should be carefully considered before making decisions. It's essential to weigh the pros and cons before investing and determine if they align with your overall portfolio strategy.

5 Types of ULIPs

Here are the different types of ULIPs available in the Indian market.

Regular Premium ULIPs

Regular Premium ULIPs are a popular type of Unit Linked Insurance Plan in India where policyholders pay fixed premiums at regular intervals and choose where their money is invested.

They offer flexibility and transparency while providing life insurance coverage and have a 5-year lock-in period for long-term wealth creation.

Regular Premium ULIPs provide a wide range of fund options and tax benefits, making them a good investment choice for insurance coverage and wealth creation.

Limited Premium ULIPs

Limited Premium ULIPs allow investors to enjoy insurance coverage and investment benefits without paying premiums throughout the term.

This gives investors flexibility in choosing their financial goals and requires minimum initial investment.

Please consult with your insurance company for details about charges such as fund management and partial withdrawal charges. It is essential to read all the details carefully before investing.

Life Stage ULIPs

Life Stage ULIPs adjust their investment strategy based on age to balance market risks and steady returns, allowing you to re-balance your portfolio without additional charges.

They offer multiple fund options tailored to your risk appetite and come with tax benefits. Investing in Life Stage ULIPs can be a good choice if you're unsure about investing in mutual funds directly or managing market risks while achieving long-term financial goals.

They cater to different financial goals of policyholders at different stages of their lives and provide life insurance coverage, tax benefits, and multiple fund options.

Child ULIPs

Child ULIPs are insurance plans that secure children's futures. They may provide Waiver on Premium add-on, corpus for education, and partial withdrawals. They also offer portfolio diversification, which helps reduce investment risk and grow savings over time.

Loyalty additions boost the maturity value by adding an extra sum of the assured amount every year. Child ULIPs also offer flexibility when planning for future expenses such as higher education or wedding costs.

The lock-in period ensures disciplined savings while allowing partial withdrawals after five years, which can be useful in emergencies.

ULIPs For Retirement Planning

ULIPs offer life insurance coverage and the potential to grow wealth simultaneously, making them a great option for retirement planning.

Different types of ULIPs are available that adjust the asset allocation as the investor's age progresses towards retirement to minimise market risks. Long-term capital gains from ULIPs remain tax-free if held up to one year.

Short-term capital gains tax on debt-oriented ULIPs is charged at the individual's slab rate if the period of holding is 36 months or less. However, the tax implications of ULIPs can vary depending on the specific policy and the insurance company offering it.

Unit Linked Insurance Plan Cash Value Growth

The unit-linked insurance plan (ULIP) sees the cash or fund value flourishing. It is a blend of premium contributions and investment returns from specific underlying funds handpicked by the policyholder. Part of the paid premiums actively supports insurance coverage. However, an amount remains dictated by risk appetite. That's strategically invested in equity, debt, or balanced funds.

These underlying funds determine whether there is appreciation or depreciation in fund value based on their performance. Compounded returns foster the gradual cash value growth over time, enabling policyholders to create wealth.

ULIP vs ACKO Life Flexi Term Plan

Feature	ULIP	ACKO Life Flexi Term Plan
Type of Insurance	Combines insurance coverage with an investment component, offering potential returns linked to market performance.	Pure term insurance plan provides coverage for a specific term without an investment component.
Investment Component	Includes investment options such as equity, debt, or balanced funds, potentially allowing policyholders to grow their wealth.	It focuses solely on providing life cover without any investment element, ensuring the affordability of premiums.
Flexibility	Offers flexibility to switch between different funds based on market conditions or personal financial goals.	Provides flexibility in terms of coverage amount, premium payment frequency, and policy duration, with options for customisation.
Premium Allocation Charges	Deducted from premium payments to cover administrative and distribution expenses and investment management fees.	Generally, there are no premium allocation charges, ensuring that a higher portion of the premium goes towards providing life cover.

About ACKO Life Flexi Term Plan

The ACKO Life Flexi Term Plan is an exclusive term plan with unparalleled flexibility and adaptability to the changing demands of life. With this plan, you can customise your life coverage, policy duration and more. A list of riders available for extra protection includes Critical Illness, Accidental Death, and Total Permanent Disability.

The claim process is simple, and with ACKO's demonstrated track record of claim settlements, you can trust that your loved ones will promptly receive the financial help they require, granting them reassurance and assistance when needed.

KEY TAKEAWAYS:

Adaptable Sum Assured	Flexible Policy Tenure	Flexible Payout Options
Will Creation Service	Affordable Premiums	Easy Claim Process

Find the right plan-->

Determine Which Policy Works For You

If you're searching for an affordable and adaptable term policy, the ACKO Life Flexi Term Plan is likely the best choice.

Situation	Recommended Policy
Life insurance coverage and investment options	Unit Linked Insurance Plan
Limited budget or temporary coverage needs	ACKO Life Flexi Term Plan
Prioritise flexibility and customisation	ACKO Life Flexi Term Plan
Seeking polished digital-first experience	ACKO Life Flexi Term Plan
Desire investment accumulation possibilities	Unit Linked Insurance Plan
Uncertain about long-range financial needs	ACKO Life Flexi Term Plan

3 Different Types of ULIP Charges

Here are the primary features of Unit Linked Insurance Plans.

1. Premium Allocation Charges

ULIPs have premium allocation charges, a fixed percentage of the first-year premium paid and are deducted before allocating funds to the policy.

These charges vary based on age, gender, policy terms, and financial goals and tend to be relatively high in the first few years of a policy compared to traditional insurance plans.

However, they decrease over time as investments start yielding returns. When investing in ULIPs, it's essential to factor in these charges when calculating potential returns.

Ultimately, they allow access to a wide range of equity or debt funds for long-term wealth creation with life insurance coverage, making them attractive for retirement planning.

2. Fund management charges

Fund management charges are fees charged by ULIP policy providers for managing your investment funds, and they're capped by the IRDAI at 1.35%.

These fees can vary depending on the type of fund you choose to invest in, but they're crucial for generating higher returns with the help of professional fund managers.

It's important to choose a plan with reasonable charges and invest for an extended period to maximise your gains while comparing different policies before making a final decision.

3. Top-up options

ULIPs offer a unique "top-up" option for individuals to invest additional lump sums on top of their existing premiums.

This feature provides flexibility and can help investors reach their financial goals faster. Many insurers offer low charges on top-ups, making them an attractive option for supplementing primary premiums and achieving better returns within a shorter period.

4. Surrender Charges

Surrender charges are fees incurred for withdrawing funds from ULIPs before the five-year lock-in period ends.

Charges range from Rs 1000- Rs 3,000 within the first four years of the policy, depending on the terms and conditions of the insurer. It's important to weigh these costs against potential gains and avoid premature withdrawals to benefit from bonus payouts and higher returns until maturity.

ULIPs offer flexible solutions for long-term financial goals, including wealth creation and life insurance coverage.

Tips for Buying ULIP Plans

Focus on the long term: Remember that these investments offer returns over an extended period, and your gains will materialise only if you have the patience to wait until maturity. They are not designed for quick profits. Internalise this point.

Set a clear objective: The primary aim for everyone should be to acquire sufficient life insurance coverage to safeguard against any unforeseen events. Determine a specific amount and look for a ULIP that aligns best with your needs.

Seek customisation: ULIP plans offer a variety of riders that can be utilised to tailor the overall strategy to suit individual preferences. Inquire about these riders to gain more insight and utilise them judiciously.

Additional Riders Available

Waiver of Premium Benefit Rider

Your regular income might face disruption due to various circumstances, such as permanent disability resulting from an accident or the inability to work due to a critical illness. In such instances, a waiver of premium rider guarantees the waiver of all future premiums towards your ULIP, ensuring the uninterrupted continuation of your investment and life cover.

Accidental Death Benefit Rider

This rider offers supplementary financial assistance beyond the life insurance coverage provided by the ULIP in the event of the insured person's demise due to an accident.

Accidental Permanent Total/Partial Disability Benefit Rider

Subject to the terms and conditions of the rider, in the event of total or partial disability due to an accident, this rider disburses a lump sum amount to the life assured.

Critical Illness Benefit Rider

Incorporating the Critical Illness Benefit rider into your ULIP policy enables you to receive a lump sum if you are diagnosed with any critical illnesses covered under the policy. This provides you and your family coverage against the financial repercussions of such illnesses.

Family Income Benefit Rider

This rider offers financial assistance upon the occurrence of the following events: the death of the life assured, accidental permanent total disability, or the initial diagnosis of any specified critical illness covered under the policy.

Choosing the Right Unit-Linked Insurance Plan

Selecting the appropriate ULIP plan entails considering various factors. Below are some key elements to aid you in choosing the most suitable ULIP plan:

Investment Goals: The primary and pivotal factor to contemplate is your investment goal, determined by your risk tolerance and investment horizon. This will facilitate the selection of the optimal ULIP option that is aligned with your objectives.

Consider Charges: Investing in ULIPs incurs multiple expenses. Before investing, consider these expenses, as higher charges may diminish your returns.

Check Fund Options: Ensure that the available fund options align with your investment goals and risk tolerance by conducting a thorough evaluation.

Factors Affecting Unit Linked Insurance Plan

Selecting the perfect ULIP plan demands thorough deliberation. Before opting for a policy, it's essential to assess the following factors:

Your Investment Objectives Before zeroing in on any investment scheme, take the time to delineate your investment objectives. Consider the timeframe and the amount required. Your goals will serve as a guide in selecting the most suitable funds to align with your needs.

Your Risk Appetite Evaluate your willingness to tolerate risk. For risk-averse individuals, heavier investment in debt funds might be prudent, as they offer gradual but stable returns over time.

ULIP Charges Every ULIP plan includes additional charges. Before investing, ensure thorough evaluation and comprehension of these extra costs.

The Fund Performance ULIPs with a track record of consistent performance are likely to offer superior returns.

Fund Selection and Investment Options: ULIP plans

Investment options and fund selection can be simplified into three categories: equity funds, debt funds, and balanced funds.

Equity Funds: Equity funds are high-risk investments that offer higher returns over time but carry higher risks.

Debt Funds: Debt funds are low-risk investments mainly invested in fixed-income securities like government or corporate bonds.

Balanced Funds: Balanced funds offer a balanced approach to investment portfolios, holding stocks and bonds.

When selecting a fund, it's important to consider factors like historic performance, volatility ratio, expense ratio, and Asset Under Management (AUM).

ULIP investments have a lock-in period of 5 years, making them ideal for long-term goals like a child's education funding or retirement planning. However, it's important to note that surrender charges may be imposed if one opts out before 5 years from the commencement date, which may incur a loss.

About withdrawing funds from ULIPs

Top-up investments are allowed to raise additional funds, and partial withdrawals are allowed up to 20% of the policy's fund value.

One should always consider the impact on long-term goals before raising or withdrawing funds from their ULIP investment.

Careful planning and management can ensure positive outcomes for both coverage and growth objectives.

Wrapping Up

While ULIPs offer the dual advantage of life insurance protection and investment growth, it's crucial to familiarise yourself with the various charges associated with ULIPs before making a purchase. If you seek to provide financial security for your family while also aiming to accumulate wealth through market-linked returns, ULIPs present an ideal option. Understanding the specific ULIP charges applicable in India will enable you to make a well-informed decision.

Frequently Asked Question

Below are some of the frequently asked questions on Unit Linked Insurance Plans

How does a ULIP work?

ULIPs (Unit Linked Insurance Plans) are investment plans that offer both risk coverage and wealth creation through market-linked returns. When you invest in a ULIP, you pay a premium as per the product or plan. A part of the premium goes towards the insurance component of the ULIP plan, while the remainder is invested in the capital market with the aim of earning profitable returns for the policyholder.

Who can invest in a ULIP?

ULIPs are suitable for investors of any risk profile and those who are looking for additional insurance cover and market investment opportunities. However, it is important to note that ULIPs are a long-term investment product.

What are the advantages and disadvantages of ULIPs?

The advantages of ULIPs include flexibility, dual benefits of investment and life cover, tax-free income, and the ability to invest in a variety of qualified funds. However, investments in the capital market are always subject to risks, and ULIPs come with additional fees to manage the policy. It is important to carefully consider the pros and cons before investing in a ULIP.

Is investing in ULIP a wise choice?

Whether ULIP proves to be a prudent investment hinges on several factors, including your financial objectives, tolerance for risk, and investment timeframe, while it presents growth opportunities, it also carries inherent market risks.

Is ULIP considered a high-risk investment?

Indeed, ULIP is classified as a high-risk investment due to its allocation in equities and other market-based securities.

How can I optimise ULIP returns?

To enhance returns on your ULIP investment, you can implement several strategies:

Maintain a long-term investment approach.

Select appropriate funds based on your risk appetite and financial goals.

Regularly assess and adjust your portfolio.

What’s the maximum coverage I can get for an Accidental Death Benefit rider?

As per the IRDAI, you can purchase an Accidental Death Benefit Rider with coverage up to three times (3x) the base sum assured of your life insurance policy.

What exactly does "fund value" signify in ULIP?

The fund value in ULIP indicates the present market worth of your investment portfolio, determined by the number of units held and the prevailing Net Asset Value (NAV).

What new options do I have for adjusting my premium?

As per the IRDAI, you have the option to decrease the premium amount or sum assured of your life plan after 3 years instead of the previous restriction of 5 years.

Is ULIP a superior option compared to Fixed Deposit (FD)?

The suitability of ULIP versus FD relies on your unique financial aims and risk tolerance. While FD assures a fixed return with minimal or no risk, ULIPs hold the potential for higher returns due to their exposure to market-linked assets. However, this potential for increased returns is accompanied by heightened risk.

Disclaimer: The content on this page is generic and shared only for informational and explanatory purposes. It is based on industry experience and several secondary sources on the internet, and is subject to changes.