Life insurance firms sell ULIPS (Unit Linked Insurance Plans), a package that combines investing and insurance. This makes the product a dual goal protector because it benefits your nominee whether you live through the insurance period or not by investing in a life goal.
Prior to now, unit-linked insurance plans have received a lot of negative criticism due to their high cost. However, the IRDA, India’s insurance regulatory body, has made a concerted effort to decrease fees significantly. Many insurance firms have introduced fourth-generation ULIPS, which have no policy administration or policy allocation fees. The fees associated with ULIPs are minimised, leading to an increase in their popularity.
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How do they operate?
Due to the fact that ULIP plans also include investment components in addition to insurance coverage, a portion of the premium is used for life insurance and related costs, such as fund management fees, with the remainder, depending on the ULIP type, being invested in debt, equity, or a hybrid (mix of both) investment. You can use a ULIP calculator to estimate future returns and the value of a ULIP investment.
Aspects of ULIPS:
- Death benefit: The term “sum assured” refers to the minimum death benefit that a ULIP offers. If the fund increases in size beyond the amount assured, the insurer will add value to it. Some plans offer fund value in addition to the amount assured. But the premium for such insurance is higher.
- Maturity benefit: The life cover, which is the sum assured, ceased to exist at the end of the policy term, and you would only receive the fund value as maturity benefits. When the policy matures, you will have the choice of recurring payouts, such as annual, monthly, half-yearly, or quarterly, in addition to a lump sum payout.
- Tax benefit: Any successful investment must result in sizeable ULIP tax benefits in order to be a success. ULIPs offer this benefit in great detail, and the payable premiums are tax-free thanks to Section 80C of the Income Tax Act of 1961. Additionally, a tax deduction of up to a maximum of Rs. 1.5 Lac is available on the payable premiums for ULIPs under Section 80C of the Act. A minimum lock-in period of five years must pass before the subscriber may request a withdrawal. The amount that the subscriber withdraws after the lock-in period has passed is likewise exempt from taxation under Section 10D of the Income Tax Act. As a result, Sections 80C and 10D permit ULIPs to take advantage of ULIP tax benefits, which can then be used to reduce taxes.
Charges on ULIPs
The following are the normal ULIPs fees and charges:
- Premium allocation charge: A significant portion of the premiums paid in the first year are considered initial and renewal charges, in addition to the agent commission. The estimated value of your ULIP investment can be calculated using a ULIP calculator based on the premiums, tenures, and other information you enter.
- Mortality charges: These pay for the price of life insurance. It is dependent on age and the amount assured, and it is taken out each month. The risk value for the insurer decreases as your investment increases, which causes the mortality charge to steadily decrease.
- Fund Management Charges (FMC): They are fees assessed by the insurer for administering funds in ULIP plans. It is subtracted before calculating Net Asset Value (NAV) and is modified daily based on NAV. The annual maximum FMC allowed is 1.35% of the fund value, and it is assessed daily.
- Charges for fund switching: There are a few free fund switches available with insurers, but additional switches may incur fees of between Rs. 100 and Rs. 200.
- Charges for partial withdrawals: While some plans have a limit of two to four times, others allow limitless partial withdrawals.
Reasons to invest in ULIPs
- Flexibility in terms of fund choices: The majority of ULIPs offer a selection of debt, equity, and balanced fund options. You can make investments based on your financial needs and risk tolerance. You can move your money between different funds with ULIPs in order to maximise returns.
- The flexibility of life cover: ULIPs provide you with the freedom to decide on your sum assured at the outset of your policy. Additionally, some ULIPs give you the option to increase your sum assured over the course of the plan to meet your protection needs at different points in your life.
- Premium flexibility: ULIPs allow you to pay a top-up amount in addition to your current premium. Utilising this choice will optimise returns on investment.
- Rider flexibility: Riders are optional extras that let you personalise your ULIPs and add more insurance coverage. A unit-linked rider for accident and disability compensation is a typical type of rider.
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