Every earning member of the family must be careful about two things, creating wealth to support their life goals and ensuring that their dependents remain safe in their absence. A Unit-Linked Insurance Plan (ULIP) is one product that takes care of both these aspects. Read on to learn what is ULIPand how you can take full advantage of it.
What is ULIP?
ULIPs are life insurance policies that also offer you the option to put your money in long-term investment instruments. Insurance companies invest part of your premium in equity, debt funds as per your needs, risk appetite, financial life goals after deducting applicable charges. Your ULIP fund is made of units, and the worth of each unit is known as the Net Asset Value (NAV). The insurance provider updates the ULIP NAV regularly. So, you are always aware of the fund’s performance.
How to benefit from ULIP
Here are a few tips that you can follow to get the best out of your ULIP:
- Pay the premium on time
You have to pay the premium timely to keep the what is ULIP active during its tenure. Failing to do so may lead to policy lapse, resulting in you losing the plan’s benefits. Insurers offer a lot of flexibility in terms of premium payment options. You can either choose a single lump-sum payment or regular payments. The latter comes with monthly, quarterly, half-yearly, and yearly payment alternatives.
- Decide how to allocate your money
It is essential to take some time to decide how to distribute the money among multiple funds to achieve the result you expect. Following this idea can help you make the most out of your ULIP.
- Choose the right investment instrument
There are two types of investment avenues available under ULIPs:
- Equity funds or stocks
- Debt funds, such as government securities or bonds
Insurers have experienced fund managers who look after your investments, depending on your requirements and risk appetite. As you are the one who decides whether to invest in equity or debt funds, take your time to study the financial market first.
- Learn about the charges
ULIPs have specific fees that insurance providers charge from your ULIP NAV by cancelling units. These expenses include administrative fees, fund management fees, and mortality fees. Knowing about these charges will help you determine the total cost of the policy.
- Switch funds wisely
Fund-switching is a feature in ULIPs that lets you reallocate your investment according to your changing needs. While purchasing your ULIP, you can decide how to divide the money among equity and debt funds. If your risk tenacity changes with time or the financial market becomes volatile, you can switch from equity funds to debt funds to minimize risk. Similarly, when the market performs well, you can shift the money from debt funds to equity funds to earn lucrative returns.
- Learn about taxation
ULIPs have varied benefits that help you save more. Firstly, Section 80C of the Income Tax Act, 1961 offers a yearly tax deduction of up to INR 1.5 lakh on the premium paid. Additionally, Section 10 (10D) makes the death benefit tax-free. If the annual premium is under INR 2.5 lakh, the ULIP maturity benefit will also be tax-exempt. However, for policies with a yearly premium over INR 2.5 lakh, you have to pay a 10% long-term capital gain tax on the income. This is applicable only if you have bought the policy on or after February 1, 2021.
There are different types of ULIPs available in the market, offering a variety of features. You can find detailed information regarding them on the insurer’s website. Make sure to purchase a policy only after understanding it thoroughly.