Why Should You Choose ULIPs Over Other Investment Options?

From vaccination, school to higher education, my friend Satish planned everything even before the birth of his son. Also, one day he sat with his wife and decided the travel destination for the next two years. Not only this, but he also started investing to support his ‘planning’. He was confident that his investment would help him meet all the expenses.

It is good to plan in advance and then start investing for it. However, investing and investing smartly both are different things. Like most of the people, Satish also valued safety over returns and chose safe instruments, like fixed deposits, PPF, etc.; to meet all his future goals. Though considering the safety of returns while investing is not a bad idea, but what most of us forget to consider is the inflation impact. Instruments like fixed deposits, PPF, NSC can give you assured returns, but they can’t give you surety that the returns would be sufficient to beat the rising inflation rate.

As Warren Buffet, says “Do not put all eggs in one basket,” you should also diversify your investment across different options to reap the maximum benefit. So instead of putting the entire investment in fixed instruments, invest some amount in ULIPs which you can invest both in equity and debt as per your risk appetite. Killing two birds with one shot, ULIPs offer high returns along with the life cover.

Let’s have a look at some of the benefits of ULIPs:

1. High returns: ULIPs give you an opportunity to enjoy high returns by investing your money in equity. According to the Morgan Stanley report, equity has generated best returns in India over 5,10,15 and 20-year tenure as compared to gold, real estate, and fixed deposits. While equities gave 12.9% returns, gold, bank fixed deposits, and real estate generated 8.4%, 5.5%, and 6.2% respectively.

How ULIPs Have Performed

Source: Economic Times

2. Assured benefits: Along with the potential to grow your money, Unit Linked Insurance Plans ULIPs also protect your money from the market ups and downs. The insurer offers guaranteed returns on the invested amount. At the time of maturity, the insurer pays you higher of assured benefit or fund value. In some cases, the assured benefit can be 101% of all the premiums paid.

3. Switching option: Switches play a major role in rebalancing your investment portfolio as per the market condition. It is the best option to move out of loss-making funds. According to the market condition, you can adjust your fund portfolio by switching from equity to debt or vice versa. Also, you can switch as per your age and needs. During young age, the policyholder can take more risk and thus, stay invested in equities. However, as the policy moves towards the maturity date, he can switch from equity to debt to protect the investment from market volatility. Most of the insurers offer four to five free switches to policyholders.

4. Transparent structure: As it is said, “risk comes from not knowing what you are doing,” ULIP offers a transparent structure. It means all commissions and charges are clearly mentioned in the policy document. Besides, insurers send daily updates on Net Asset Value (NAV) along with quarterly and yearly reports on the performance of ULIPs. It means you can track its performance and keep a close watch on your policy.

Besides this, all ULIP fund options are clearly detailed in the policy document. Usually, insurers offer the following types of fund options.

Type of Fund Nature of Investment Risk Element
Equity Funds (also called growth fund) The investment is made in company’s stock with an aim of capital growth Medium to High Risk
Bond Funds (also called income and fixed interest) The amount is invested in government securities, corporate bonds and various other fixed income investment options Medium Risk
Secure Fund (also called cash fund, money market fund) The amount is invested in bank and money market instruments Low Risk
Balanced Fund It offers a mix of investment in equity and debt Medium Risk

5. Lesser charges: In 2010, the Insurance Regulatory and Development Authority of India (IRDAI) capped charges at 3% of gross yield for insurance policies with tenure of up to 10 years and 2.25% for those with tenure of over ten years. Also, there are no surrender charges if the policyholder surrenders the policy after five years. Depending on the tenure of the policy, the charges in ULIP are around 2.5%-4%. The most impressive thing about these charges is that they are evenly distributed throughout the policy tenure. Unlike other market-oriented products where the first premium goes towards these charges, in ULIPs only a small proportion of the premium is deducted as charges and the remaining is invested in the market.

Feature Pre-September 2010 Post-September 2010
Lock-in period 3-years 5-years
All charges Could be front loaded Evenly distributed during the lock-in period
Minimum mortality cover Not specified; five times as a practice 125% of the annual premium for single premium policies and 10 times for regular premium policies
Maximum reduction in yield* Not specified For policy tenure less or equal to 10 years, reduction not more than 3% at maturity and 2.25% for policy tenure above 10 years

* Difference between Gross and Net Yield.

Source: Business Today

6. Wealth boosters: Most of the insurers add wealth boosters to the investments and thus, help you to grow your money without making any extra investment. Usually, wealth boosters are added once in every five years starting from the end of the tenth policy year.

7. Top up investment: ULIPs allow individuals to invest the excess cash through periodic top-ups and earn returns on the total invested amount. Further, the top-up investment also enjoys tax benefits under both Section 80C and 10(10D).

8. Liquidity: Though, it is always advised to stay invested for the longest tenure, you can partially withdraw your money to meet any short-term needs like child’s college fee, family vacation or for a medical emergency. Unlike fixed deposits, where there are charges on premature withdrawal, in ULIPs, partial withdrawals are free of cost in most of the cases.

9. Tax benefits: ULIPs offer EEE tax benefit. The premium paid towards ULIPs is eligible to get a deduction for up to Rs 1.5 lakh under Section 80C of the Income Tax Act. Like a traditional life insurance policy, death benefits paid under ULIP are also tax-free. Of course, the payouts will be higher than the sum assured, depending on the returns.

Similarly, upon maturity, the policyholder will get the assured benefit or the fund value, whichever is higher. This payout is exempted under Section 10(10D).

Tax Advantage of ULIPs

Source: The Times of India

10. Life insurance and riders: An additional benefit of life cover is available to ULIP policyholders, which is not available in any other investment options. In the case of death of the policyholder, the insurer will pay death benefits to the nominee who can use it to meet various needs. In this way, you can financially secure your family’s future, even in your absence. Moreover, there are various riders, like premium waiver, accidental death benefit, etc.; that can be added to the main policy to get more coverage. For instance, accidental death benefit rider gives double the sum assured to the nominee in case of accidental death of the policyholder.

11. Online buying: Unlike PPF, ULIPs can easily be bought online from the comfort of your home. Moreover, the online distribution has sharply cut the distribution and maintenance costs, so much so that there are various ULIPs whose cost is lower than mutual funds.

Invest wisely, live happily.

We often prefer to invest in a financial instrument that offers not only high returns but also secures our hard earned money. ULIPs serve both these purposes. So look at market fluctuations as your friend and participate in them to reap the maximum benefits. After all, “Don’t work for money, make it work for you.”

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