Unit linked insurance plan or ULIP, a life insurance product, offers risk cover for the insured together with investment options
Unit linked insurance plan or ULIP, a life insurance product, offers risk cover for the insured together with investment options. In this, a part of money is invested in stocks, bonds and similar assets, while the remaining part provides the insured with a life cover.
At maturity, ULIP policyholders get back the investment portion of the policy.
Like any other investment made by investors, the risk of fluctuation due to market volatility, is to be ensured by the policyholders in case of ULIP.
So, is it a good idea to buy ULIPs as it combines insurance and investment?
That is never a great idea fundamentally, say some experts.
“From a financial planning perspective, it is always better to keep the insurance and investments separate. Once somebody starts a ULIP, they are required to pay a premium every year till the defined premium paying term,” they say.
“Sometimes they may fail in both—generating good returns and offering adequate insurance cover. Also, these plans are very expensive,” according to BankBazaar.
Compared to other endowment plans, ULIPs are, however, more transparent products in terms of how the money is being invested and what charges are being deducted. ULIPs have a variety of charges that includes allocation charge, policy admin charge, mortality charge and fund management charge.
"Investment portfolio can have up to 100 percent exposure in equities, over the long-term, ULIPs sometimes may help investors in building a decent corpus. However, in terms of providing insurance cover, most ULIPs do not offer life cover more than 25 times the annual premium," adds BankBazaar.
One thing that may work in favor is, however, convenience as they cover three things in one go - insurance, investment and tax-saving.
“For investors, who wants some protection, an investment-linked insurance plan works well,” says Naval Goel, CEO & Founder, PolicyX.
“It assists with immediate and uninterrupted cash flow. In the case of death, the family gets the sum assured and the fund value. Also, they offer better post-tax returns compared to mutual funds due to tax benefits attached to it,” he adds.
Owing to the higher premiums, it is easier to exhaust the deduction limit of Rs 1.5 lakh under Section 80C with ULIPs. The maturity benefit is always tax-free unlike mutual funds, where capital gains from debt funds are taxable.
First Published: IST