Buying an insurance product requires prospective policy-holders to pay heed to a number of factors. From quantum of premium and sum assured to additional benefits, customers tend to consider an array of factors and much more.
But when it comes to a ULIP (United Linked Insurance Plan), the key consideration for an investor is to earn a higher return on investment made. No prizes for guessing that ULIP is seen more of an investment product than an insurance plan.
We explore what are the key factors a prospective policy holder should consider before buying a ULIP scheme.
Range of benefits
As the name suggests, ULIPs are seen as an investment first, and an insurance product later. They offer a range of benefits such as tax deduction under section 80C. The premium payments for ULIP funds are eligible for tax exemptions up to ₹1.5 lakh. Even death benefits received by the policy holders is also tax exempt.
Some experts suggest that one should have an active insurance cover before they buy a ULIP scheme since they are tax-saving financial instruments which also double as insurance product.
“Insurance cover in ULIP is an add-on feature of sorts. Usually, it is seen as a form of investment. So, a policy-holder should first buy a life insurance before deciding to buy a ULIP,” says Deepak Aggarwal, a Delhi-based financial advisor.
Notwithstanding the change in tax treatment in 2021 wherein maturity proceeds were made liable to tax in the cases where premium paid for ULIPs was ₹2.5 lakh or above, ULIPs are multi-purpose investment instruments which offer good returns while giving insurance cover at the same time.
“ULIPs are one of the most preferred investment routes that offer a combination of investment and insurance. There are twin benefits of ULIPs. The first being, you can fulfil the long-term goal of wealth creation by investing in equity or debt or both. Depending on the kind of investments you make, an average ULIP plan produces an annual return of 12-15 percent. And the second: While it creates a pool of wealth, the same policy offers life cover,” said Vivek Jain, Head, Investments, Policybazaar.com.
The premium paid for ULIP is segregated into two parts: the first is meant for insurance, while the second is used for investment purpose.
“In case of the demise of the policyholder, the plan will ensure payout to the family. Post Covid-19, there’s a renewed focus on the importance of insurance and therefore, this plan serves as one of the best instruments for getting a return on investments and also securing your family’s financial future,” added Vivek Jain, Head, Investments, Policybazaar.com
It’s the dual purpose of ULIP that makes it distinct from a conventional insurance plan. The death benefit in ULIP is higher of the basic sum assured or the fund value at the time of claim.
The sum assured is 10 times the annual premium, which is not a sizeable sum in the first few years of policy. Conversely, a term insurance offers a death cover of 20-25 times of annual premium, a better proposition in terms of sum assured for a young policy holder.
This is the reason that insurance experts often advice their clients that ULIPS should ideally not be the first insurance product, and can be taken once the policy holders already has an insurance policy.
Top funds in ULIPs include Aditya Birla Capital (Pure Equity), Tata AIA Life Insurance (Super Select Equity Fund), Bajaj Allianz (Pure Stock Fund), Edelweiss Tokio Life (Equity Top 250 fund) and Tata AIA (Large Cap Equity Fund), among others.
“It is advisable to invest for a longer period to reap higher benefits, keeping in mind your risk appetite and investment goals. The new-age 4G ULIPs available in the market today provide multifaceted benefits such as wealth creation, long term investment, and financial security post retirement,” added Vivek Jain.
Some ULIP funds also allow for fund accumulation to continue even after the policyholder's death. For instance, in case of HDFC Life Click2Protect Premium Waiver ULIP, the premiums are waived on death of the policyholder, enabling the continued accumulation of the policy fund.
The waiver of premium is a feature common among several other insurance providers. This way, the policy becomes more like an investment product instead of an insurance plan.