Insurance
•03 min read
Welcome to our brand-new series, A-Zs of Insurance. In this series, we will venture into the world of insurance to breakdown insurance jargon for you, so you’re empowered to make informed decisions about your financial security.
In today’s uncertain world, financial planning is of utmost importance. You never know when you might need money, whether it’s because of a medical emergency, a sudden home repair, inflation hitting the roofs, and more. Your loved ones also need a financial safety net for all their goals and obligations in the case of any unfortunate incident.
Not to mention your own financial aspirations and hopes. Buying an apartment, sending your child abroad to their dream university or giving them a gala wedding, retiring early and travelling the world --- all these goals need strong monetary support.
How can you manage all these financial needs? With a ULIP, of course! Let’s understand what it is, how it works, and why you invest in one.
A ULIP, or Unit-Linked Insurance Plan, is a kind of life insurance plan. Think of it as a financial guru-cum-guardian angel mashup. It’s made up of two parts: investment returns and insurance coverage.
ULIP Investment Portion | ULIP Insurance Portion |
A part of the premium you pay for the ULIP is invested in market funds like equity funds, debt funds, hybrid funds, etc. You get returns from this investment after your ULIP’s policy term is over. | The remaining part of your ULIP premium is used towards life insurance coverage, which helps provide financial stability to your loved ones. |
Let’s first have a look at the investment side. Here's what happens:
1. Choosing a fund to invest in
You get the option to choose from a variety of market-linked funds, depending on your investment goals and risk appetite. You can pick from equity, debt, hybrid, etc., fund options.
2. Paying associated charges
A ULIP offers opportunities for building wealth through market-linked investments along with assured financial protection for your family members. You get dual benefits under one plan.
A portion of the premium you pay for a ULIP is invested in market funds. You get returns from this investment when the ULIP matures. This accumulated wealth can be used for all your dreams like real estate investments, kids’ education or wedding, early retirement, and more.
A ULIP also offers life insurance benefits, giving your family ample financial protection in times of need.
A ULIP gives you the flexibility of picking the fund for investing our money. This is usually based on how much risk you’re willing to undertake and the amount of wealth you want to accrue. If you’ve invested in a particular fund and aren’t happy with its performance later, you can easily switch to another fund of your choice. And the best part is that switching funds attracts no taxes and sometimes is free of cost as well.
ULIPs also offer tax benefits on the premium and the payout under Sections 80C and 10(10D) of the Income Tax Act. Please note that this is subject to income tax laws of India.
A ULIP can come with an assortment of charges for the various services provided by the insurer. These can include fund management charges, fund switching charges, mortality charges, etc., which are typically deducted from your investment premium.
3. Conversion into units
After you’ve selected a fund, your invested premium is converted into units, based on the fund NAV (Net Asset Value) on your day of investment.
Number of units you hold = (Invested Premium – Charges)/NAV
Please note that your investment’s fund value depends on the number of units you hold along with the fund NAV, which changes every day along with stock market conditions. So, the fund value you hold = Number of units you hold x NAV of that particular day
4. Premium payment
Depending on the premium payment frequency and duration you’ve opted for, you’ll be required to pay further premium amounts at regular intervals to keep your ULIP in force. With each premium payment comes an increase in the units you hold.
5. Maturity returns
A ULIP’s investment returns are given to you when the plan matures, i.e. when its policy period ends. For instance, if you buy the plan in 2024 for a term of 20 years, you’ll get the returns in 2044. These returns depend on the fund NAV on the date of maturity.
Now, let’s have a look at what happens on the insurance side. This is basically a life insurance
cover, which gives your family financial stability in your absence. The payout they’ll receive if such an unfortunate incident occurs will typically be 10 times your premium, and will help them take care of daily expenses, debts, life goals, and more.
Here’s why a ULIP can be a good option:
