WHAT IS A ULIP & DIFFERENT TYPES OF ULIP FUNDS
A Unit-Linked Insurance Plan or a ULIP is a hybrid type of plan
offered insurance companies that gives you the benefit of both Insurance as
well as Investments. In a ULIP, a part of the premium that you pay is allocated
towards insurance and the remaining is utilized for investment in funds
available within the plan. In this way, ULIP gives you both insurance cover as
well as returns on investment through a singular medium.Max Life Fast Track
Plan by Axis
Bank is a good example of a ULIP where you get to select from six funds
and shorter payment terms for quicker accumulation of returns through
investment along with the insurance cover.
Types
of Funds under ULIP
While the specific nature of a fund varies from one plan to the
other, the investment
plans under ULIPs are generally of three types: –
Equity Funds – These funds are focused towards towards investment in stock market where the risk-return ratio is
high. The Fund performs in tune with the volatility present in the stock
market.
Debt Funds – These funds invest in debt instruments like Bonds where the
returns are comparatively lower as compared to equity but the risk is low as
well.
Balanced Funds – Hybrid funds which give you adequate exposure to stock market
as well as debt instruments. The risks accompanied by the equity portion is
balanced out by the safer investment in the debt portion.
Features of Unit Lined Insurance Plan (ULIP)
ULIPs initially had a lock-in period of 3 years but in 2012,
IRDA (Insurance Regulatory and Development Authority) intervened and defined
new guidelines which changed the lock-in period to 5 years. From a tax saving
angle, ULIPs provide deduction under section 80C of the Income Tax Act, 1961.
ULIPs also have surrender options but it is important to note here that if
you have availed tax deduction from ULIP and surrendered it before the lock-in
period matures, then the deduction availed in the previous years will be
considered as a part of the income and will be taxed accordingly.
Like any other financial product, this insurance-cum-investment
product has its own features, some of which are very unique. The first such
feature is the Top-Up in ULIP. What that means is that you can invest over and
above your annual premium amount. This top-up can be directed towards the
insurance component which results in the insurance cover being increased or
towards the investment component if the selected Fund is performing well.
The second important feature is switching between funds. At the
time you bought a ULIP, you would have selected the best fund according to
market conditions. However, it may happen sometimes that the Fund doesn’t
perform as well as anticipated or that the market conditions change. In such an
instance, you have the option to switch to a better performing Fund and this is
generally facilitated free of charge by most products upto a certain number of
switches in a year.
How to select a ULIP Plan:
When selecting a ULIP, understand all the charges involved like
fund management fee, premium allocation fee, surrender charges, administration
and service charges. Apart from that, try to be well-versed with the features
and benefits of the ULIP that you have selected.
Another important thing is to time your fund investments well.
For example, when the market rates fall, there are lot of stocks that can be
purchased at a lower value and when the market is at its peak, going for debt
instruments is a safer bet. This is where a Fund Manager plays a big role. But
most importantly, you must understand that ULIP
is a long term investment option which is why you should be clear about your
investment and insurance objectives when putting your money in a ULIP to get
the maximum benefit from the investment.
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