TYPES OF ULIP PLANS: WHICH ONE SHOULD YOU BUY?
What do you see when you imagine your future? A happy family, educated children, and a financially stable and secure life, right? If you’re looking to secure the future and also build your wealth, a ULIP plan is a financial product worth considering. By buying a ULIP policy, policyholders get the benefit of both insurance coverage and investment returns under a single scheme.
Let’s explore the different types of ULIP plans.
What is a ULIP?
A Unit Linked Insurance Plan (ULIP) is a hybrid plan offered by insurance companies that combines the benefits of insurance coverage and also allows for wealth generation through investments. The premium paid by the policyholder partly goes towards insurance coverage, and the rest is allocated to a fund invested in asset classes according to the ULIP policy chosen by the policyholder. It is a long-term plan, and it is chosen based on the financial goals and risk appetite of the policyholder.
What are the types of ULIP plans?
ULIP plans can be categorized based on investment or the ULIP policy’s features in wealth creation.
Based on investment:
In this ULIP plan, the money is invested in equity and equity-related funds such as a company’s stocks. This type of investment is susceptible to market risks as the entire fund is invested in equity. Therefore, it is suitable for people with a big risk appetite in the early stages of financial planning looking to generate maximum returns on investment.
Depending on the market conditions and the performance of the investment, the ULIP returns could potentially be very high.
In this ULIP plan, the funds are invested in debt instruments, such as government securities or corporate bonds, or fixed-rate bonds. Compared to equity investments, this is a less risky option and is suitable for people who have a moderate risk appetite, as it could potentially yield medium returns on investment.
Under this plan, the ULIP funds are invested in money market instruments, cash deposits, or bank deposits with a specified level of interest. It is a safe investment and is suitable for people with a low risk appetite. It tends to yield lower returns.
This ULIP plan invests the money in a combination of debt and equity instruments, thereby balancing the debt and equity component of the investment. The risk is distributed over different classes of investment and may sometimes include money market instruments as well. Therefore, this is a medium-risk plan where the ULIP returns could potentially range from medium to high returns.
Based on the ULIP policy’s benefits/features in wealth creation:
Life Stage Based and Non-Life Stage Based:
Your risk appetites and financial goals change as time passes. Life-stage-based plans recognize this and vary your investments accordingly. For instance, under these plans, the first allocation when the policyholder is younger might be more equity-heavy. However, as the policyholder gets older, the investment is changed accordingly to reduce the risk.
Guaranteed1 and Non-Guaranteed1 Plans:
A guaranteed1 ULIP policy is suitable for savings and shields the policyholder from intensive market risks by limiting equity exposure. In non-guaranteed1 plans, the policyholder can choose the type of investments they want to make from the funds available under the policy. So, if they want to invest more in equity, they can choose to do so, depending on their financial goals.
Single Premium and Regular Premium:
This feature depends on the capability of the policy buyer to pay the premium. Depending on the ULIP policy, the policyholder can pay the premium in one lump sum when buying the ULIP policy or at regular intervals, such as monthly, yearly, etc.
Which ULIP Policy should you buy?
The ideal ULIP policy for you is one that aligns with your financial goals and your risk appetite. You should consider certain factors before buying a ULIP policy. They are:
Financial and Investment Goals:
There are many types of ULIP policies, so it is essential to evaluate your financial goals before buying one. You may want to secure your post-retirement years, provide for your children’s education or marriage, or you may want to start early and build a corpus for later years.
Secondly, you should evaluate how much you are willing to invest and whether you are looking to generate savings or trying to build your wealth.
There are different types of funds in ULIP plans. Depending on your financial goals and the stage at which you are buying the ULIP policy, your risk appetite will differ.
For a person starting young, the risk appetite is higher. Therefore, they will most likely invest in equity funds or make higher-risk investments. Conversely, the later you avail of it or the older you are, your risk appetite will likely be lower. As seen earlier, different investments come with different risk profiles to match different risk appetites.
Features of the ULIP Policy:
A ULIP policy can allow you to switch between funds. Switching refers to switching between debt or equity investments, depending on the market conditions so that you are not overexposed to market risks.
ULIP plans also enjoy tax* benefits. The premium paid under a ULIP is deductible under Section 80C of the Income Tax, 1961, up to a limit of ₹ 1.5 lakhs for a premium payment up to 10% of the sum assured. The sum assured when paid in the event of a policyholder’s death is exempt from tax for the receiver under Section 10 (10D) of the Income Tax Act, 1961.
Ultimately, ULIPs are long-term investments, and ‘time in the market is better than timing the market’. By staying invested over a long period, you can ride out the market cycles and ensure your investments yield returns, making ULIPs a balanced option for meeting your financial goals.
TATA AIA Life Insurance’s ULIP policies offer several benefits, such as the option of a waiver of premium rider# in the case of partial or total disablement, which you can add to your plan. You also have the option to make your Tata AIA Life Insurance policy payment in a lump sum or at regular intervals for a fixed period, and you can choose from various funds available based on your financial needs.
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