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IN THIS POLICY, THE INVESTMENT RISK IN INVESTMENT PORTFOLIO IS BORNE BY THE POLICYHOLDER
 

ULIPs - Advantages and Disadvantages

 

Unit Linked Insurance Plans (ULIPs) are plans th []at combine life insurance with investment options linked to the market. They allow you to invest in different types of funds while still having some protection for yourself or your loved ones. ULIPs come with advantages such as the potential for growth, flexibility to switch between funds, and long-term coverage. However, market-linked risks, possible charges that reduce returns may need regular monitoring. Understanding both sides can help you decide if a ULIP suits your goals and comfort with risk. In ULIPs, the investment risk in investment portfolio is borne by the policyholder.

 

What is a unit linked insurance plan (ULIP)?

A Unit Linked Insurance Plan (ULIP) is a life insurance product that combines protection with investment. It allows you to invest in market-linked1 funds while also providing life cover. A ULIP can help you build wealth systematically like other investment options, while ensuring financial security for your family through the sum assured. Investing in a ULIP is a great strategy, especially if you are looking to create a corpus to meet your mid-term and long-term goals.
 

However, before making a decision about which ULIP plan is better, here are some features, pros, and cons of this tool that you must be aware of.
 

What are the various features of a ULIP?

The following are the features of the ULIP plan:
 

  • Life insurance coverage

    A ULIP offers life insurance coverage, which helps ensure that your loved ones get covered along with investing in the chosen funds.
  • Market-linked returns

    The returns of a ULIP are market linked1, meaning the returns are based on how the market performs, allowing your investments the potential to grow as the funds perform well.
  • Partial withdrawals

    You can withdraw part of your investment after the lock-in period, which can help address short-term expenses without liquidating the entire investment.
  • Switching option

    ULIPs allow you to switch your investments between equity, debt, or balanced funds.
  • Tax benefits

    Premiums paid toward a ULIP are eligible for tax* deductions, and the maturity proceeds is tax-free under specific circumstances.
  • Lock-in period

    The lock-in period of five years in a ULIP promotes regular investing and ensures that the fund is invested for sufficient period to grow.
  • Loyalty additions

    Some ULIPs offer loyalty additions, where extra units are added after a specific investment period, enhancing the total value of your fund.
  • Fund options

    Multiple fund options allow you to select investments that align with your risk tolerance and financial objectives.

What are the Advantages of ULIPs

Here are some advantages of a ULIP:
 

  • Offers more returns

    The funds you invest in a ULIP are invested in the stock market. This enhances the potential for higher returns. During favourable market conditions, these investments can generate significant growth.
  • Creating wealth for future generations

    A ULIP offers multiple benefits within a single policy. It provides a sum assured allowing you to accumulate wealth for your dependants, while also building wealth for your own future. This advantage ensures both protection and long-term financial growth.
  • Can be used as an emergency fund

    One of the useful features of a ULIP is that it allows partial withdrawals after the mandatory lock-in period of five years. Although ULIPs are primarily considered mid or long-term investments, they can be highly effective in the short term in case of an urgent financial need.
  • Provides you with tax benefits

    Under the ULIP tax* benefits, premiums paid are eligible for a deduction of up to ₹1.5 Lakh under Section 80C of the Income Tax of 1961. The death benefit paid to the nominee on the demise of the policyholder is completely tax-free.
  • Offers flexibility

    A ULIP allows you to switch between funds multiple times to ensure that your money reaches its optimal growth.

What are the Disadvantages of ULIPs

Here are some disadvantages of a ULIP:
 

  • Subject to market risk

    Your funds are invested in the stock market and are therefore subject to market volatility. Your returns depend on market performance and may result in either a gain or a significant loss.
  • Costlier than other insurance plans

    As compared to other insurance plans, such as term insurance, whole life insurance, etc.,  which are pure protection plans, a ULIP can be more expensive as it includes protection with wealth creation. So, this may not suit individuals with a limited budget.
  • Fixed lock-in period

    The fixed lock-in period for a ULIP is 5 years. During this period, you cannot assess or withdraw your money.
     
  • High costs and charges

    ULIPs include multiple fees such as premium allocation, policy administration, and fund management charges, especially higher in the early years, which can reduce your overall returns.
     
  • Market risk and no guaranteed returns

    Since ULIPs are linked to market performance, returns are not guaranteed and can fluctuate based on market volatility, leading to potential losses.
     
  • Five-year lock-in period

    ULIPs come with a mandatory 5-year lock-in period during which withdrawals are not allowed, limiting liquidity for short-term needs.
     
  • Lower returns compared to mutual funds

    Due to higher charges and their dual structure of insurance plus investment, ULIPs typically offer lower returns than standalone mutual fund investments.
     
  • Lower life cover

    A significant portion of your premium goes toward investment, resulting in lower life insurance coverage compared to pure protection plans like term insurance.
     

Are ULIPs a good investment?

ULIPs are investment options that combine life insurance with market-linked1 growth, which makes them different from traditional plans. Compared to traditional plans, ULIPs provide life cover along with potential returns that may be higher due to equity exposure. ULIPs also include a lock-in period of five years, encouraging disciplined investing and long-term financial planning. Additionally, tax benefits under Section 80C and exemptions on maturity proceeds under Section 10(10D) further enhance their suitability for long-term financial goals.

However, ULIP returns are linked to market performance and may fluctuate over time. ULIPs may suit investors seeking long-term growth while securing life cover. However, understanding fund allocation, risk level, and policy terms is important before investing.
 

How is ULIP different from FD (fixed deposit)?

A fixed deposit provides fixed interest income for a chosen tenure. It is a low-risk option but does not provide life insurance. On the other hand, a ULIP combines insurance and investment. You receive life cover while also investing in market-linked1 funds. Unlike FDs, ULIPs offer the flexibility to switch between different fund options, such as equity and debt. ULIPs also offer tax deductions on premiums under Section 80C and tax-free maturity proceeds under Section 10(10D). Besides this, you don’t pay GST on ULIP premiums for individual life insurance policies.

FDs only provide tax exemption on the invested amount, while the interest is taxable. The returns from FDs remain fixed and predictable, whereas ULIP payouts vary based on market performance. FDs may suit individuals looking for assured income and stability, while ULIPs provide an option that combines long-term investment growth with life insurance protection.
 

What is the death claim payable in case of ULIP?

In a ULIP, the death benefit is the amount paid to the nominee if the policyholder passes away during the policy term. The nominee will receive either the sum assured or the fund value, whichever is higher. Even if the fund underperforms and its value is lower than the sum assured, the insurer will still pay the full sum assured to the nominee.
 

When is the right time to invest in ULIP?

You should consider the following factors before planning to invest in a ULIP:
 

  • Optimal timing:

    The right time to start ULIP investment is when you have a steady income and can commit to long-term premiums. Starting early may also help you benefit from the ‘Power of Compounding’.
  • Age and life stage:

    At a younger age, you may prefer equity-oriented funds for potential growth. As you approach retirement, shifting towards debt-oriented funds may provide stability.
  • Impact of market conditions:

    Although market fluctuations affect ULIP performance, it’s better to focus on long-term goals rather than short-term movements. Even in a down trending market, continuing with ULIP may support disciplined investing.
  • Align with your financial goals:

    ULIP may be suitable when your financial goals align with the policy tenure. Whether it is for education, retirement planning, or asset building, aligning goals with the ULIP lock-in period is important.

Final words

ULIPs combine life insurance protection and investment opportunities, offering a dual benefit within a single plan. It provides flexibility through fund switching, partial withdrawals, and different fund options. The lock-in period also encourages disciplined long-term investing. At the same time, ULIPs involve costs and market-related risks that must be carefully assessed. Understanding ULIP advantages and disadvantages and aligning it with your financial objectives can help you decide whether it suits your long-term strategy.
 

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Tata AIA Life Insurance

A joint venture between Tata Sons Pvt. Ltd. and AIA Group Ltd. (AIA),  Tata AIA Life Insurance  is one of the leading life insurance providers in India. We post everything you need to know about life insurance, tax savings and a variety of lateral topics such as savings and investments in this space. You can access and read a host of different blogs, articles and pages at the Tata AIA Life Insurance Knowledge Center or get in touch with us with any queries or questions!

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FAQs

  • How are ULIPs different from traditional insurance plans?

    Traditional insurance plans mainly provide life cover, while ULIPs combine insurance protection with investment options through market-linked1 funds.

  • Are ULIPs suitable for long-term wealth creation?

    Yes, ULIPs are structured with a five-year lock-in and may suit long-term financial planning where disciplined investment is required.

  • What tax benefits are available under ULIPs?

    Premiums paid qualify for tax deductions under Section 80C, and subject to certain conditions, the maturity proceeds may be exempt under Section 10(10D).

  • Who should invest in ULIPs?

    ULIPs may be suitable for individuals who seek both life cover and market-linked1 growth in a single plan while committing to the long term.

  • Disclaimer

    • Insurance cover is available under the product.
    • The products are underwritten by Tata AIA Life Insurance Company Ltd.
    • The plans are not guaranteed issuance plans, and they will be subject to the Company’s underwriting and acceptance.
    • For more details on risk factors, terms and conditions, please read the sales brochure carefully before concluding a sale.
    • This blog is for information and illustrative purposes only and does not purport to any financial or investment services and does not offer or form part of any offer or recommendation. The information is not and should not be regarded as investment advice or as a recommendation regarding any particular security or course of action.
    • Please know the associated risks and the applicable charges from your Insurance agent or the Intermediary or policy document issued by the insurance company.
    • Every effort is made to ensure that all information contained in this blog is accurate at the date of publication. However, the Tata AIA Life shall not have any liability for any damages of any kind (including but not limited to errors and omissions) whatsoever relating to this material.
    • *Income Tax benefits would be available as per the prevailing income tax laws, subject to fulfilment of conditions stipulated therein. Income Tax laws are subject to change from time to time. Tata AIA Life Insurance Company Ltd. does not assume responsibility on tax implications mentioned anywhere in this document. Please consult your own tax consultant to know the tax benefits available to you.
    • For ULIP:
      • IN THIS POLICY, THE INVESTMENT RISK IN INVESTMENT PORTFOLIO IS BORNE BY THE POLICYHOLDER
      • THE LINKED INSURANCE PRODUCT DO NOT OFFER ANY LIQUIDITY DURING THE FIRST FIVE YEARS OF THE CONTRACT. THE POLICY HOLDER WILL NOT BE ABLE TO SURRENDER/WITHDRAW THE MONIES INVESTED IN LINKED INSURANCE PRODUCTS COMPLETELY OR PARTIALLY TILL THE END OF THE FIFTH YEAR.
      • Past performance is not indicative of future performance.
      • All investments made by the Company are subject to market risks. The Company does not guarantee any assured returns. The investment income and price may go down as well as up depending on several factors influencing the market.
      • Please make your own independent decision after consulting your financial or other professional advisor.