ULIPs, or Unit Linked Insurance Plans, are innovative insurance plans that combine investment and life insurance benefits into one policy. These integrated plans offer dual benefits to the policyholder and are different from traditional life insurance policies. ULIPs enable policyholders to build wealth to achieve their long-term life goals through systematic investing and market-linked returns.
How do ULIPs Work?
ULIP is a one-of-a-kind financial product that also provides life insurance cover. It allows policyholders to invest in various debt or equity funds based on risk tolerance. They can also switch between funds to create the most suitable and profitable ULIP strategy. While the premiums paid by a policyholder are tax-deductible under Section 80C, the ULIP returns are tax-free under Section 10(10D) of the Income Tax Act of 1961. As a result, ULIPs provide a triple benefit of financial security, tax savings, and capital appreciation for your family.
Lock-In Period of ULIPs
A five-year lock-in term is mandatory in ULIPs. Although a policyholder can opt out after five years, it is not recommended. To get the most out of their policy, policyholders must invest for a long time, say 15-20 years. The policyholder has the option to switch funds if he believes the funds are not functioning as expected.
What are the Costs Associated with ULIPs?
A unit-linked insurance policy has six primary charges. These are listed below.
- Premium Allocation Charges
The PAC costs are deducted from the premium payment in advance. An upfront deduction denotes that a portion of the premium is deducted before the ULIP investment is divided into insurance and investing amounts. The charges removed are for the insurance company's costs of executing the paperwork, marketing the product, and other miscellaneous expenses.
- Fund Management Charges
The insurer deducts this fee for administering the money in the ULIP plan. IRDAI has capped the FMC charges at 1.35 percent. Before arriving at the fund's net asset value, the insurer subtracts the FMC.
- Mortality Charges
The insurer imposes mortality charges to handle the product's insurance portion. The costs are determined by several factors, including the policyholder's age, health status, policy amount, and policy duration. Mortality charges are applied because an insurer assumes that the insured will live until a certain age before paying out the policy. If the policyholder does not live to the insurer's projected age, the insurer is compensated via given mortality charges.
- Policy Administration Charges
The company imposes the fees to cover all administrative costs of maintaining the policy.
- Switching Charges
Some insurance firms allow policyholders to switch funds for a defined period of time. Following that, a switching charge is applied. The insurance company sets the switching fees, and it varies depending on the insurer.
- Surrender Charges
When a ULIP policy is canceled prematurely, an insurer imposes surrender charges. The costs are determined by the policyholder's decision to cancel the policy before or after the lock-in period.
After learning about the ULIP plan and how it works, you'll see that the ULIP benefits are unrivaled. You may not only construct the finest investing strategy for yourself and get tax benefits, but you can also ensure your family's financial security by having your life covered. As a result, even if you are not around, you can attain your life goals using ULIP benefits.
