In these unpredictable times of a global pandemic, it is important to have a financial plan that can not only secure you financially but also protect your family in the unfortunate event of your absence. The latter can be resolved by purchasing a life insurance policy, while the former can be achieved by focussing on long-term wealth creation. Both these goals together can be achieved by investing in a single investment avenue viz. Unit-Linked Insurance Plan or ULIP.
ULIP is a hybrid investment product, that strives to meet both investment and insurance needs. The policy premium gets invested in different funds of the policyholder’s choice — which can be across multiple asset classes. This preferred long-term financial planning product also comes with substantial tax benefits under Section 80C and Section 80 CCD of the Income Tax Act. Under section 80 CCD, the maturity proceeds or the sum assured for policies up to Rs 2.5 lakh premium is tax-free. Another benefit of investing in a ULIP is that intra fund switches are tax-free, unlike some other financial instruments that attract a capital gains tax.
Before investing in a ULIP, you should keep in mind the following:
Opt for optimum sum assured
The sum assured is the lump-sum amount promised to the policyholder’s nominee in case of the former’s death during ULIP tenure; it is declared at the time of purchase. It’s advisable to opt for a sufficient sum assured as this amount would be used to take care of the family in the unfortunate event of the policyholder’s demise. ULIP products with a return of mortality charge should be preferred, as they offer the benefit of the return of mortality premium in the unfortunate event of death of the policyholder.
Extra charges involved
Some common charges that are associated with ULIPs are policy administration charges, premium allocation charges, fund management charges, top-up charges, mortality charges, switching charges, rider charges, premium discontinuance charges etc. Not all insurance providers levy all these charges while some even return the amount charged under heads. Before approaching an insurance provider, ensure that you have a clear idea about the different types of charges being levied. A policyholder should understand the total amount of charges and the impact it could have on potential returns, prior to the purchase of the ULIP Policy Plan. New-age ULIPs have considerably lower charges.
Insurer’s credibility & solvency
ULIPs are long-term investments and therefore it is imperative to check the credibility and pedigree of the insurance provider before arriving at a purchase decision. Insurance companies are highly regulated and the regulator ensures that all companies meet the solvency guidelines. The solvency ratio measures an enterprise’s ability to meet its long-term debt obligations and is a good indicator of the insurer’s financial stability
Rebalance asset allocation based on your risk profile and goals
The asset allocation for the ULIP policy should be selected based on the risk profile of the policyholder. Risk-averse policyholders can put their investments in debt funds, while aggressive investors can opt for equities. One can also choose a balanced approach by investing in a fund that offers a hybrid option (i.e. a mix of equities and debt).
Compare and choose products wisely
Before buying a ULIP plan, make sure you compare features and analyse all the products available. Analyse the underlying funds of the products, including the objectives of the fund and past performance. But do keep in mind that past performance is not indicative of the future performance of the funds.
ULIP plans available in the market can be a great option to meet your insurance and investment needs, and can help you achieve your goals. These plans also offer tax-saving opportunities, choice of multiple investment portfolio strategies and varied asset allocation with switching options. But before investing in a ULIP, make sure that you know all the variables involved to make a well-informed decision.
(The author is Head–Equity & Executive Vice President, Investments, Bajaj Allianz Life. Views expressed are personal.)