Investing in ULIPs and what makes it so Popular


Comes the tax season every year and we all start running hastily in a bid to save tax through different investment options. While tax-saving is one of the most important investment decisions that should be done at the start of the financial year, most people delay it till the time actually comes when the taxman knocks at our doors to collect the dues. A good tax-saving instrument should not only give adequate tax benefits but also yield good returns over the period of time. While investment options, such as bank FDs, PPF, and NSC help in tax saving, the smarter option is to invest in Unit-Linked Insurance Plans or ULIPs. Besides offering tax benefits of up to Rs 1.5 lakhs, ULIPs help to grow your money over the period of time. In fact, in the past one year, a large part of premiums of private insurers has come from ULIP policies. The largest private insurer, ICICI Prudential Life Insurance, had 85% of its new premiums coming from ULIP in financial year 2015 as compared to 66% in financial year 2014. (Source: The Economic Times)

We all work hard to give a secured and comfort life to our loved ones. However, without taking any action from our side, we won’t be able to achieve this objective. We must understand that investing regularly is not only about putting some cash aside for your rainy days. In fact, investing is about making your money to grow over the years by choosing right investment options as per your needs. A ULIPis a long-term investment option that allows wealth creation at market-linked rates. Further, in case of your sudden demise, the insurance company pays death benefits to the family so that they continue to lead a comfort life as you always wanted for them.

To elaborate, ULIPs allow you to:

· Switch funds as per the market condition: You can switch between different fund optionsto protect your investment from market volatility. It means, if the market slows down, you can switch your funds from equity to debt which is a safer option. Most of the insurers offer 10-15 free switches in a year. This facility is not available in any other financial instrument.

· Secure funds for important life’s milestones: You may need funds at life’s different stages, such as child’s education, marriage, and business venture. The partial withdrawal facility of ULIPs helps you to get your money at important life stages.

· Goal oriented investment: With the help of ULIP, you can make an investment to achieve goals of your life, such as child’s education, marriage, and retirement. For goals that need to be achieved in the near future, say 2 or 3 years, investment in debt funds of ULIPs would be a correct choice. Further, those goals that will arise beyond 7 or 10 years, you can invest in equity funds of ULIPs.

Getting over the ULIP aversion

In the past, due to the high charges, ULIPs were unpopular amongst investors forcing a sequence of reformatory actions. But the good news is that these investment plus insurance plans have again become popular amongst investors as they have been revised into a highly cost effective option, with some levying charges even lower than few mutual funds. Also, the Insurance Regulatory and Development Authority of India (IRDAI)tightened measures in 2010, capping the annualized charges of ULIP’s at 2.25% for the first 10 years of holding. In fact certain insurance companies have reduced charges even further; to be at par with other competing products like mutual funds.

Getting the tax advantage

Besides the low charges of ULIPs; the key benefit they offer is the easy and tax free transfer from debt to equity and vice versa. Mutual fund holders need to pay tax on the short and long term gains made on the fund while switching; but with ULIP’s gains and maturity amount are tax free. But to avail this benefit one needs to opt for a sum assured at 10 times or more the yearly premium amount.

Why invest in a ULIP?

Though a ULIP plan may not be for everyone; especially those purely interested only in investment; but has become a rather popular option between certain people interested in the dual benefit it offers. Moreover since the 2010 IRDA guidelines have assured that the combined charge of a ULIP cannot exceed 2.25% per year for the first 10 years, and the fund management fee cannot surpass 1.35% per year; making it an excellent cost effective option for investors.

Few things you need to know before investing in a ULIP –

· While ULIPs provide life cover, the amount of life cover is a maximum of 10 times the annual premium which is not high enough if the objective is to secure one’s life. When it comes to investing in a ULIP, live cover is only an added benefit.

· Lock in period for ULIPs is 5 years to help get the best out of the product; and ideally keeping it for 10-15 years helps reaps high benefits.

· ULIPs come with a feature called “partial withdrawals”. What this means is that you can take out some portion of your invested money should you need it without coming out of your investment completely.

Considering its revised low charges and tax-free nature, ULIP is gaining popularity asthe long term instrument. It gives you certain amount of life cover and good returns. Hence it is an instrument for someone looking for a long term investment which also offers some amount of insurance.