Unit Linked Insurance Plans, more popular as ULIPs, are a type of instrument that offer life insurance and the opportunity for capital appreciation in the long term. The premium of a ULIP is typically divided into two parts, one of which provides insurance cover on life and the rest is invested in mutual funds of the investor’s choice.
Depending upon the risk appetite of the policy buyer, the investor can choose equity or debt mutual funds where the money should be invested. It can also be invested in a combination of debt and equity mutual funds.
Investors also have the choice of switching investments between debt and equity funds for a certain number of times in a year.
Some of the popular ULIPs are offered by Aditya Birla, Bajaj Allianz, PNB Metlife, Pramerica etc.
ULIP Calculator
Here is a calculation for investments in ULIP using an online free calculator.
Suppose a person invests Rs 10,000 per month in a ULIP. Let the person continue the investment for 10 years. The rate of return expected from the investment is 8%.
The amount that would accumulate in 5 years is Rs 7.34 lakh on a cumulative nominal investment of Rs 6 lakh.
The sum that would accumulate in 10 years is Rs 18.1 lakh and the amount of nominal investment would be Rs 12 lakh.
Best ULIP returns range 12-15%
Expand the investment horizon to 15 and 20 years and the amounts would inflate to Rs 26.6 lakh and Rs 39.1 lakh respectively. The nominal investments of the person would be Rs 18 lakh and Rs 24 lakh respectively.
Remember we have assumed an 8% return, while the best performing ULIPs have even delivered 12-15% returns on average over the past 5 years.
Fair degree of liquidity in ULIPs
ULIPs have a fair degree of liquidity too. One has the option of partial withdrawal that allows taking out a part of the money for say the education needs of your kid or some other emergency. Usually, there are no penalties for part withdrawals.
ULIPs are so designed that one could use them for meeting certain financial goals such as accumulation of funds, higher education of a child or even retirement planning.
Tax benefits of ULIP
One added benefit for investors is that investments in ULIP are eligible for tax breaks. One can claim income tax deductions on the premium paid in ULIPs under section 80C of the Income Tax Act 1961.
Section 10(10D) of the same Act offers an investor tax efficiency on the entire maturity proceeds at the end of the term.
IRDAI qualifier
However, insurance regulator Insurance Regulatory and Development Authority of India (IRDAI) has pointed out that the element of risk in ULIPs should be communicated by the insurance companies.
As for any instrument, it is prudent to consult a qualified investment advisor before putting one’s hard-earned money into ULIPs as well.
Though a part of the premium of an ULIP is invested in mutual funds they are essentially insurance products and, therefore, are regulated by the insurance regulator.
Aditya Birla, Bajaj Allianz, PNB Metlife, Pramerica offer some of the popular Unit Linked Insurance Plans (ULIPs). Investor can claim income tax deductions on the premium paid in ULIPs. Personal Finance Business News – Personal Finance News, Share Market News, BSE/NSE News, Stock Exchange News Today
