5 Lesser-Known Facts about ULIPs You Must Know

ULIPs are life insurance policies coupled with market-linked investment and may be an option for those who want to invest long-term goals and also provide insurance coverage. There are a few lesser-known facts about ULIPs that you need to know before investing. However, such as how charges, fund options, withdrawals and policy terms can impact your investment. Knowing these can be a useful step to determine if a ULIP is suitable for you based on your financial objectives and risk tolerance.

A Unit Linked insurance plan or ULIP combines the benefits of life protection and market-linked returns in one investment instrument. The premium you pay under the plan is partially allocated toward buying a life cover whilst the remaining amount is invested in funds that you can choose according to your risk preferences and financial needs.

If you wish to assume a high degree of risk, you can choose equity-oriented funds which bring high but volatile returns. On the other hand, if you have a low risk appetite, you can choose debt-oriented funds and be assured of a constant return. You also have the option to choose hybrid funds that invest partly in equity-based instruments and partly in debt-based ones.

In ULIP plans, returns are determined by the increase in the Net Asset Value (NAV) of the funds under the plan. Each investor in the fund is allocated a certain number of units proportionate to their investment in the fund. If the NAV of the selected fund increases, the unitholder gains in terms of the number of units allocated to them. At the end of the plan’s term, the fund value is used as the basis to provide either a lump-sum amount to the investor or a regular income for a fixed number of years.

If you are exploring ULIPs, knowing the features beyond their basic insurance and investment structure can help you make a more informed decision. These lesser-known facts about ULIPs include fund-switching flexibility, protection of the life cover and the treatment of various policy charges. Here are some lesser-known facts about ULIPs you must know before choosing a plan:

1. You can switch between funds

ULIPs allow you to switch your investments between available fund options, such as equity, debt and balanced funds. This can help you adjust your portfolio based on your changing financial goals and risk tolerance. Depending on the policy, a specified number of fund switches may be available without an additional charge.

2. Your life cover does not automatically reduce with fund performance

A ULIP combines life insurance with market-linked investments. If the value of your selected fund falls due to market movements, it does not necessarily mean that the life insurance cover reduces. The applicable death benefit is determined by the terms and conditions of the policy.

3. ULIPs can offer tax benefits

Tax treatment is another important aspect among the lesser-known facts about ULIPs. Premiums may qualify for deductions under applicable provisions of the Income Tax Act, subject to prevailing conditions and limits. Maturity proceeds may also receive tax benefits when the prescribed conditions are met. Investors should check the latest tax rules before investing.

4. ULIPs have several types of charges

ULIPs may involve charges such as fund management charges, premium allocation charges, mortality charges, policy administration charges, switching charges and partial withdrawal charges. These costs can affect the overall value of your investment. Therefore, reviewing the applicable charges before purchasing a policy is important.

5. Some charges are subject to regulatory limits

The charges applicable to ULIPs are not necessarily unlimited. Regulations prescribe limits for certain charges and overall reduction in yield, depending on factors such as the policy term. However, the actual charges vary between plans. Reviewing the policy document can help you understand the cost structure and its potential impact on returns.

Understanding these lesser-known facts about ULIPs you must know can help you evaluate a policy beyond its investment potential. Always consider the policy's charges, benefits, fund choices, lock-in requirements and applicable tax rules before making a decision.

ULIPs are versatile instruments for investment that have the features of insurance as well as investment. Therefore, ULIPs offer a wide range of benefits to investors and must be included in your portfolio. Some important ULIP benefits have been discussed below.

• ULIPs encourage the habit of systematic savings through periodic contributions to the plan.
• ULIPs offer tax benefits on the premium payments.
• ULIPs allow you to choose between different types of funds depending on your financial needs and your risk appetite.
• ULIP returns are usually realised over a long period, thereby providing a substantial cushion against inflation to investors.

A majority of investors exit their ULIP after the completion of the predetermined lock-in period. However, ULIP benefits can be fully realised only if you choose to stay on for the full term of the plan. Therefore, it is advisable to keep your ULIP plan active even after its lock-in period has come to an end. Most insurance providers offer multiple options to investors vis-a-vis the term of the premium payment.

For instance, Tata AIA offers investors the flexibility to choose the mode and duration of discharging their premium obligations. Under the Tata AIA investment plan, you can opt for a single premium policy payment or premium payment for a limited term of 5 to 7 years. Furthermore, there are more than 10 fund options you can choose from according to the timelines of your financial needs.

You can also switch between funds in response to the changes in market conditions. Being proactive in keeping your ULIP investments updated allows you to maximise the returns from them. Furthermore, ULIP plans can be made more extensive in coverage by including riders like the waiver of premium rider (UIN- 110B029V02) under which no further premiums need to be paid in the event of total and permanent disability to the policyholder or diagnosis of a terminal illness during the plan’s term.

Knowing the features of ULIPs is essential before investing in them, as they combine life insurance and investment in the market. Lesser-known facts about ULIPs can help you make informed decisions like switching between funds as per your risk profile, opt for an appropriate sum assured, policy term and understand the charges applicable to your plan. It also helps you to assess potential risks and benefits better if you know the lesser-known facts about ULIPs you must know. When you read the terms carefully, check the cost and investment options of the policy to decide whether a ULIP is suitable for your long-term financial objectives.