Unit-linked insurance plans (ULIPs) are quite popular among investors. They are flexible, have the potential for generating attractive returns and can help in fulfilling your financial goals. However, before investing in a suitable ULIP, you need to understand all the important aspects of the plan so that you can make the right investment decision.
So, here are some tips on how to make an informed decision about investing in ULIPs.
Tip# 1: Understand How the Plan Works
The first thing that you should know is how ULIPs work. ULIPs are different from other traditional plans. So, understanding how they work is important. Under ULIPs, you choose the premium amount, the sum assured, the policy tenure and the fund into which you want to invest. Thereafter, at the time of investment, specified charges are deducted from the premium. The net premium is, then, invested into the chosen fund(s). As the funds grow, your investment grows and you earn returns. You can also switch between the available funds, make partial withdrawals and top-up additional premiums to enhance your investments.
Tip#2: Beware of the Risks
ULIPs are market-linked in nature. The funds, themselves, invest in market-linked securities. As such, the returns are not guaranteed. When the markets are in an upswing, you can earn attractive returns on your investments. However, in a downswing, you might incur losses too. So, know that the returns are non-guaranteed and depend on the market performance.
Moreover, there are different types of funds available under ULIPs. Equity funds are high risk-high return funds, while debt funds have a low risk. Balanced funds, conversely, combine both equity and debt, thereby giving moderate returns at moderate risks. Therefore, understand the risks involved with ULIPs and choose investment funds based on your risk profile.
Tip#3: Know the Charges
Different types of charges are associated with ULIPs, the primary ones being:
- Premium allocation charge
- Mortality charge
- Policy administration charge
- Fund management charge
Check the charges when investing. Compare and choose a plan that has the lowest charge structure to get the maximum returns on your investments.
Tip#4: Check the Benefits
Most ULIPs have a similar benefit structure. Higher of the sum assured or the fund value is paid in the case of premature death of the policyholder. On maturity, in contrast, the fund value is paid. However, some plans offer additional ULIP benefits such as inbuilt riders and additional returns added to the fund value. Hence, check the benefit structure of the plan that you are buying to know what to expect.
Tip#5: Know the Tax Implications
ULIPs are tax-saving avenues that help you plan your taxes effectively. However, recently, the taxation of ULIPs was tweaked. So, here are the ULIP tax implications to keep in mind:
- Premium paid would be allowed as a deduction under Section 80C. The limit is lower of the following:
- The actual premium paid
- 10% of the sum assured
- Rs. 1.5 lakhs
- The death benefit is always tax-free
- The maturity benefit is completely tax-free if the premium is limited to 10% of the sum assured and up to Rs. 2.5 lakhs. If, however, the premium is more than Rs. 2.5 lakhs, the returns earned from the ULIP would be subject to capital gains tax. The returns would be taxed as equity returns or debt returns depending on the fund that you invested in.
What Should You Do?
When it comes to your hard-earned money, you cannot be too careful. ULIPs are tax-efficient insurance plans that give you the dual benefit of insurance and investment. You can create a suitable corpus for your financial goals by investing in the right ULIP plans. To ensure that you invest in the right plans, however, you need to be careful. Use these tips to understand ULIPs and their important aspects. Then make an informed decision to invest in the right plan and watch your investment fulfil your financial goals.