It is important to consider the purpose behind the purchase of your investment before buying one. The same logic applies if you are planning to buy a Unit Linked Insurance Plan (ULIP). ULIP is designed in a manner that has benefits offered for the long haul. When you are buying a ULIP, take into consideration the purpose of your purchase. This will help you understand what a ULIP policy is and how it will benefit you. For example, you are investing in a 10-year ULIP, and you want to use the maturity amount from it for buying a house. In such a case, check the ULIP returns in 10 years of the plans that you are considering purchasing. Knowing the estimated returns will help you make financial plans accordingly.
Before buying a ULIP, it is important to know what a ULIP policy is and what it offers. Here are some things about a ULIP that you must know:
When you read through a ULIP, you will come across several insurance and investment terms. You need to be well aware of these terms and their significance before proceeding with the purchase. Once you know the components, it is important to read through the fine print to avoid any issues later.
Provides life cover
ULIP at its core is life insurance. This ensures that when you buy a ULIP, you get a life cover for the tenure of your policy. You can access your financial requirements and choose coverage that suffices the needs of your family. It is advisable to choose a cover where your dependents can survive with ease against the rising inflation, along with taking care of your liabilities. ULIP insurance ensures that, in case of your absence, your loved ones are financially secure.
Several investment options
The investment part of the ULIP offers a plethora of options catering to the needs of every investor. You can invest in debt funds if you are risk-averse. If you want high returns, you can invest in equity funds. If you want to strike a balance, there are balanced funds that offer a blend of equity and debt. They give moderate returns for the moderate risks involved. Also, you can switch between funds anytime you want. One of the ULIP benefits is that policyholders can switch from debt to equity and vice versa anytime they want. Since ULIPs are subjected to market risks, this feature comes in handy to make the most of market fluctuations.
Charges of the plan
Every financial investment has charges involved. When you are buying ULIP insurance, it is good to know the charges before making the purchase. The fund management charge reflects the percentage charges for managing your funds. Premium allocation charges cover expenses involved in policy issuance, underwriting expenses, and distribution fees. There are policy administration charges that an insurance company charges for the maintenance of your policy. Earlier, these charges were high. However, insurance companies have reduced them over the years. Several online charges have been eliminated.
ULIPs have a lock-in period of 5 years. Within that period, the policyholder cannot withdraw any funds. The purpose of the lock-in period is to inculcate the habit of savings where the policyholder can save funds in a disciplined manner. After the lock-in period has ended, you can avail of partial withdrawals for free. This is one of the ULIP benefits that come in handy in case of emergencies.
Tax implications of the plan
For any financial product that you invest in, it is important to know its tax implications. A ULIP’s benefits of taxation are enormous, as it can offer tax benefits on multiple levels. The premiums that you pay for your plan are exempt from taxes under Section 80C of the Income Tax Act. The maturity amount that you receive when your ULIP matures is also subjected to tax exemptions provided certain conditions are met. Also, in case of your unfortunate demise, the sum assured that your policyholder receives is exempt from taxes under Section 10 (10D) of the Income Tax Act.