The coronavirus (COVID-19) pandemic has proved to be a watershed moment in the history of humanity, which has significantly changed the way our world works. Approximately 51 million people across the globe have been infected with over ~1.27 million deaths1. In India alone, there have been 8.5 million cases with 1.27 lakh deaths, making it the second-worst affected country after the US1. Moreover, with tens of thousands of new cases being diagnosed every day, no one knows how long we are going to be safe. With this uncertainty looming large, it is critical that you must do everything possible in your power to ensure no matter what happens tomorrow, your future, and that of your family, is secure.
When it comes to securing your family’s financial future, life insurance is necessary for everyone, especially in times like these. However, a simple life insurance plan only provides risk cover with no returns. Therefore, there would be a payout only for the nominees of the policy if something unfortunate/untimely happens to the policyholder. For the insured persons themselves, there is only the peace of mind that their families would be taken care of even in their absence.
However, what if were to tell you that there is yet another way to secure your family’s future and achieve your personal financial goals? Yes, this is true and investing in Unit Linked Insurance Plans (ULIPs) may help you achieve just that!
ULIP as Dual Benefit Policy
A ULIP is a hybrid investment product that serves both the investment and insurance needs of an investor. It is a long-term financial planning instrument. And, on top of that, ULIPs provide tax-benefits under Section 80C of the Income Tax Act, 1961 subject to the provisions stated therein. Therefore, a ULIP is also an investment policy, which is market-linked and provides the policyholder with the triple advantages of tax benefits, insurance protection and wealth generation.
When you opt for a ULIP, your premium gets invested in the market in either equity, debt or a combination of equity & debt funds. The allocation of funds is completely dependent on the risk appetite of the investor. Moreover, some of these investment plans also provide users with the advantage of switching between funds free of cost in order to maximize their returns.
Benefits of ULIPs
There are numerous reasons why an individual can invest their savings in a ULIP policy. While the topmost among them are the triple benefits of investment, insurance and tax savings, there are many others.
- Higher Potential Returns- Since ULIPs involve investment in the debt and equity funds, they have the potential to offer comparatively higher returns. If one is willing to take more risk, they can invest in equity while a more conservative investor may invest in debt funds.
- Flexibility- ULIPs also offer flexibility to switch between equity and debt funds. However, most insurers offer only a limited number of switches. Before you decide which ULIP to go with, it is a good idea to find out how flexible the product(s) is/are in terms of the number of switches allowed during the term of the policy. This is important because a well-informed investor can maximise returns by carefully reallocating funds depending on market conditions.
- Tax Benefits- ULIPs also offer you tax benefit. Investments in ULIPs are eligible for deduction against taxable income under Section 80C of the Income Tax Act, 1961. You can deduct a total amount of Rs 1.50 lakh per annum under this Section. The maturity proceeds of a ULIP are also exempt from tax under Section 10(10D) of the Income Tax Act, 1961, subject to conditions specified therein. In case of demise of a ULIP investor during the term of the plan, the death benefit paid to the nominee is also exempt from tax under Section 10(10D) of the Income Tax Act.
- Transparent Structure- The structure of ULIP plans is transparent in nature, and thus it becomes easy for the policyholder to decipher it. One can track fund performance and NAV on daily basis.
- Systematic Saving Habit- ULIPs help an individual to inculcate the habit of systematic savings. The systematic saving from the beginning of the career will decrease the burden of higher contribution towards their life goals in the later phase.
ULIP Benefit Illustration
As per the guidelines issued by the Insurance Regulatory and Development Authority of India (IRDAI), it is mandatory for all life insurance companies to provide a ‘benefit illustration’ to new seekers of their ULIP plans. This illustration is a useful tool to understand the returns, charges and maturity as well as surrender value at various timelines and in various scenarios. Here is how to understand a ULIP benefits illustration:
- Policy year – It refers to your policy term, or the number of years you stay invested.
- Annualized premium – It is the premium that you need to pay each year. You may pay it monthly, quarterly, half yearly or annually depending on the product terms and conditions.
- Premium allocation charges – This is a percentage of the premium you pay i.e. the upfront charge which is deducted and remaining amount is invested in funds of choice.
- Mortality charges – It is the cost levied for providing risk cover during the policy term. It is charged by the insurer by way of cancellation of units under the policy. The mortality charge depends on your age, sum assured and the policy term.
- Policy administration charges – These charges represent the expenses other than those covered under premium allocation charges and the fund management charges and may be expressed as a percentage of sum assured or even a fixed amount.
- Fund management charges – These charges are levied as a percentage of the value of assets and are appropriated by adjusting the Net Asset Value and is usually done on daily basis
- Fund before FMC – This term refers to the underlying value of the fund before fund management charges are deducted.
- Fund at the end – This term refers to the value of the fund at the end of the year, after all the charges have been deducted and growth has been accounted for.
- Net yield – This refers to the net returns you earn from your ULIP after considering the overall impact of all the ULIP charges.
The Unit Linked Insurance Plans helps us to achieve our life goals. One gets the dual benefits of life protection and wealth creation by investing their money in the ULIP policies. To make most of your investment, you could consider ULIP plans by Bajaj Allianz Life Insurance. You may choose products that offer higher premium allocation. What this means is that by investing the same amount, you could get higher returns on your money, as most of the money that you pay as premium is invested in the market to grow with time.
Moreover, some ULIP plans by Bajaj Allianz Life Insurance offer return of the entire mortality charges or life cover charges deducted during the policy term at the time of maturity*. This means you get more bang for your buck. One thing to consider while opting for a ULIP plan is the flexibility in terms of how easily and how often you can make a switch between different funds. Bajaj Allianz Life Goal Assure# ULIP offers unlimited free switches. By optimally using them depending on different market conditions, you could make the most of your returns.
Because of the multi-dimensional benefits that ULIPs offer, you may consider adding them to your investment portfolio to strike a balance between your insurance and investment needs. It could serve as a one-stop solution for your family’s financial security and your long-term financial goals with added tax benefits on investment as well as maturity serving as a cherry on the top.