People usually seek insurance and investments differently. But what if we tell you that there is a policy that allows you to do both? The Unit Linked Insurance Plan is an insurance instrument that offers you the benefit of life insurance coverage and will enable you to invest in funds of your choice.
Over the past decade, ULIPs have gone through significant changes in terms of the charges. The Insurance Regulatory and Development Authority of India (IRDAI) has reduced the charges to make the product more competitive in the market.
In this article, we will be discussing the pros and cons of investing in ULIPs. Let us begin by understanding the ULIP benefits.
- Good Returns: When invested wisely, ULIPs can offer good returns. So, if you have invested heavily in equity-oriented funds, then you are bound to receive high returns (depending on the market performance).
- Insurance Coverage: In ULIPs, a part of the premiums paid are utilized towards life insurance coverage. Moreover, the policy offers mortality cover. This cover safeguards your loved ones in case of sudden dismissal, as the nominee can claim for the sum assured amount.
- Flexibility: With ULIPs, you have the liberty to switch funds, depending on the market performance and the returns earned. These changes can be made to accomplish your financial goals, as and when needed.
- Long-Term Investment: For those looking to build their wealth over time, ULIPs is an ideal investment option. Due to market fluctuations, investing in short-term ULIPs will give lower returns. On the other hand, investing in long-term ULIPs tends to yield better returns. Hence, it is ideal for people looking to accomplish their long-term financial goals such as retirement, child’s education or marriage.
- Tax Benefits: The premiums paid towards ULIP investments are tax-free under Section 80C of the Income Tax Act, 1961. Moreover, the death benefits are exempted from tax as well.
- Partial Withdrawal: Once the five-year lock-in period is over, you (the policyholder) can partially withdraw money from your ULIPs. These withdrawals are tax-free as well.
- Top-Ups: In case you have surplus cash on you, you can invest the same in your ULIP through top-ups. These top-ups are also eligible for tax deductions, provided the premium does not exceed 10% of the sum assured amount.
Now that you know the advantages of investing in ULIPs let us look at the cons.
- Expensive and Complex Product: Since ULIPs provide dual benefits of insurance and investments, the premiums for life coverage are slightly higher than term insurance. Moreover, this investment instrument is complex in terms of the charges involved.
- Higher Cost in The Initial Period: During the initial period, that is until the lock-in period, the ULIP costs are high. This is mainly due to the charges imposed on the investors that go towards policy charges.
- Market Fluctuations: Market fluctuations are common and are generally anticipated in the initial years of the ULIP investments. So, to accomplish short-term financial goals, ULIPs may not be your best investment choice.
- Fund Switches Are Chargeable After A Point: Many insurers offer free fund switches up to a specified number. However, after that, fund switching is chargeable.
- Lock-In Period: ULIPs have a mandatory lock-in period of five years, and you cannot withdraw money during this time.
Any investment product comes with its own set of benefits and drawbacks. ULIPs are ideal for those planning to build their wealth over time and want to accomplish long-term financial goals such as retirement, buying your dream house, preparing for your child’s education abroad and their marriage, etc.