Any financial decision that you are making for the long haul requires an adequate amount of research. Whether you are planning to buy insurance or investing for over 10 years in a plan, these decisions directly impact you and your family. Unit Linked Insurance Plan (ULIP) is a popular product that people are investing in for the long haul.
Why ULIP? ULIP is a dual product that offers insurance and investment in a single plan. Similar to any other insurance plan, you have to pay a premium. However, unlike most insurance products, the premiums that you pay here are divided into two parts: insurance, and investment. A part of your plan is used towards providing life cover while the other part is invested in funds of your choice. This ensures that two birds are hit with one stone. Here are some things to consider before buying a ULIP plan:
Enable wealth creation
ULIP is designed for the long haul. In order to reap its true benefits, you need to hold it for long periods. The recurring premiums you are paying build overtime. This leads to compounding, where you earn interest not only on the base principal but also on the returns earned in previous years. Investing in a disciplined approach leads to the accumulation of wealth over the years. If you are investing with a specific goal in mind, you can use a ULIP calculator to estimate the sum assured you will receive when your plan matures.
A variety of fund options
There are several funds you can choose from when you are buying a ULIP. It depends upon your risk appetite as an investor. There are usually three major categories to choose from: debt, equity, and balanced funds. Before buying a ULIP plan it is important to know that you can switch your fund allocation anytime you want. During the tenure of your policy, you can move from debt to equity and vice versa anytime you want.
Secures your loved ones
At the core, ULIP is life insurance product and offers all the benefits that a typical life insurance product does. During the duration of your policy, if you lose your life, your nominee will receive a death benefit. This death benefit is the sum assured or the fund value of your policy, whichever is higher. This ensures that in your absence also, there is a financial backup that your loved ones can rely on.
Free partial withdrawals
One of the things to consider before buying a ULIP plan is its lock-in period, which is of 5 years. During this tenure, the policyholder cannot withdraw any funds from the plan. After the lock-in period, one can access funds anytime they want for free. These free partial withdrawals come in handy during times of emergencies.
No charges in newer plans
In the initial years, ULIP policies had several charges associated with them. Transaction charges, mortality charges, premium allocation, fund management charges, and operational charges are some of them. However, things have changed for the better now. The new plans come with barely any nominal charges, and this is a major reason newer ULIPs are popular.
Several tax benefits
ULIP is a unique product, and its composition allows a policyholder to get tax benefits on multiple levels. The premiums of your ULIP plan are exempt from taxes under Section 80C of the Income Tax Act. The sum assured that your nominee receives, in case of your demise, is also exempt from taxes. Also, the amount that you receive when your ULIP policy matures has tax exemptions, subject to certain conditions. Check the current tax structures before buying the plan.
Increase coverage and investment
At different ages of your life, you will have different needs and financial decisions. If over the years you find that the current coverage of your ULIP is not enough, you can always choose a top-up. You can also increase the investment amount if you want to. With the help of a ULIP calculator, you can estimate your allocations. You can check with your insurance provider and choose from the top-up options available.