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ULIPs - Advantages and Disadvantages

 

Unit Linked Insurance Plans, or ULIPs, combine investment with life insurance. Before choosing a ULIP plan, it is important to understand both its advantages and disadvantages. Knowing these aspects helps you make a more informed decision and assess whether a ULIP aligns with your financial goals and personal needs. This article explains the advantages and disadvantages of ULIPs.

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 tax2 deductions, and the maturity proceeds is tax-free2 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.

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 tax2 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-free2.
  • Offers flexibility

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

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.
     

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 benefits2 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 deductions2 on premiums under Section 80C and tax-free2 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 exemption2 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 deductions2 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

    • 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.
    • 1Market-linked returns are subject to market risks and terms & conditions of the product. The assumed rate of returns or illustrated amount may not be guaranteed and depends on market fluctuations.
    • 2Income Tax benefits would be available as per the prevailing income tax laws, subject to fulfillment of conditions stipulated therein. For ULIP policies, maturity income will be taxable if annual aggregate premium exceeds ₹2.5 Lakh in a financial year. 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 on this site. Please consult your own tax consultant to know the tax benefits available to you.
    • This blog is for information and illustrative purposes only and does not purport to any financial or investment services and do 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.
    • 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.
    • Unit Linked Life Insurance products are different from the traditional insurance products and are subject to the risk factors. Please know the associated risks and the applicable charges, from your Insurance Agent or Intermediary or Policy Document issued by the Insurance Company.
    • The fund is managed by Tata AIA Life Insurance Company Ltd. For more details on risk factors, terms and conditions please read Sales Brochure carefully before concluding a sale. The precise terms and condition of this plan are specified in the Policy Contract.
    • Past performance is not indicative of future performance. Returns are calculated on an absolute basis for a period of less than (or equal to) a year, with reinvestment of dividends (if any).
    • Investments 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.
    • Tata AIA Life Insurance Company Limited is only the name of the Insurance Company & the Unit linked insurance product with Tata AIA/Tata AIA Life Insurance as its prefix is only the name of the Unit Linked Life Insurance contract and does not in any way indicate the quality of the contract, its future prospects or returns.
    • The performance of the managed portfolios and funds is not guaranteed, and the value may increase or decrease in accordance with the future experience of the managed portfolios and funds.
    • Premium paid in the Unit Linked Life Insurance Policies are subject to investment risks associated with capital markets and the NAVs of the units may go up or down based on the performance of fund and factors influencing the capital market and the Insured is responsible for his/her decisions.
    • Please know the associated risks and the applicable charges, from your insurance agent or the Intermediary or policy document issued by the Insurance Company.
    • This product is underwritten by Tata AIA Life Insurance Company Ltd.
    • The plan is not a guaranteed issuance plan, and it will be subject to company’s underwriting and acceptance.
    • Insurance cover is available under this product.