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8 Things to Know Before Investing in ULIPs

ULIP OR Unit Linked Insurance Plan is a dual benefit investment portfolio providing you insurance cover along with investment options. A part of premium paid towards the ULIP is put into insurance cover and the rest is further invested into debt or mutual funds and it further aids in creating wealth.

Being aware of the all the product details is the first step towards building a strong portfolio. In order to be sure of what you are stepping into, you need to do a lot of research and planning. To assist you with this and make it easier, we’ve listed below the eight most important things to consider before ULIP investment:

1. Be aware of the risk involved

The risks involved is the same as in any other investment option as the money is being invested into the same equity or debt fund. The risk factor is the sole responsibility of the person holding the policy and the insurance company is nowhere linked to it. In order to be sure of the market you need to keep a thorough check on the money market workings. Before choosing the plan you should do a complete analysis of your needs and the availability of cash along with risk analysis.

The plan you choose should always be dependent on your long term goal and the risk factor should be considered. Based on the risk you are willing to take the money is invested either in volatile funds like equities, which provides you better returns but increase the risk or they are put into stable funds like debt funds, which give you lower returns as compared to equities but the risk involved will be lesser.

You can also choose a hybrid plan which gives you a combination of both, thereby spreading your risk.

2. Choice of premium payment

Ideally, the investor can choose from three types of ULIP premium payment options :

A) One Time Premium: Under this premium option, the premium amount for the entire plan term is paid in one go as a lump sum. The same is being paid at the beginning itself.

B) Divided Premium: Under this premium option of ULIP investment you can chose a premium period term of 5, 7 or 10 years and the premium will have to be paid as per the set timelines.

C) Regular Premium: Under this premium option the premium will have to be paid on a regular basis for the entire policy duration/term.

Under divided premium and regular premium options, you also get to choose the payment frequency and it can either be annual, bi-annual, quarterly or monthly. The choice of option is to make it easier for you to make the payment depending upon your financial capabilities.

3. Charges

It is very important to be aware of the charges that are being levied under ULIP investment as these charges eat up your final pay-out. Usually under ULIP investment the charges towards administration, switch, and fund management are extremely low as compared to other investment options.

4. Switching

The main advantage of ULIP investment is you get to switch between investment portfolios based on you needs and goals. The ULIPs provides you with free of cost switches usually and the charges are dependent upon the insurance company. You should always refer to the switch charges, number of free switches available under one policy year before making the switch from one portfolio to another.

5. Limitations

It is equally important to know about what is included and what is excluded in an investment plan. Before putting your money into ULIP investment, be sure about the limitation of the policy and what will be included and what will be excluded from the benefits. Being aware of all the limitation will help you in making a calculative and benefitted decision.

6. Lock-in period

Before making a ULIP investment, it is very important to know about the lock in period of the plan. The minimum lock in period for ULIP was increased in the year 2010 by IRDA and is now 5 years as compared to earlier 3 years.

In order to get the complete benefits of the policy one needs to ensure they are keeping the policy for the entire duration of the plan/term which can be anywhere between 10-15 years. When you keep the plan active for the entire duration only then you can enjoy the complete offerings of that particular plan.

7. Premature Surrender

In order to avail the tax benefits under ULIP investment you need to ensure the policy is not surrendered prematurely as in such case you will not be able to claim any tax benefits. In case you choose to surrender the policy before five years, whatever tax you have saved will be reversed and the entire deduction claimed will be taxed and added. Post completion of the 5 year term the surrender value of the policy will be tax free.

8. Income Tax Benefits

Before making an ULIP investment you should ensure and verify the details of income tax benefits. The premium paid towards ULIP is considered under Section 80C of Income Tax Act for deductions. Along with this, the returns you receive are also tax exempted under section 10D of the Income Tax Act.

One needs to keep in mind they can avail income tax benefits on premium only if the policy cover is 10 times of the premium amount being paid on an annual basis and if the sum assured is more than 10% of the annual premium only then the 10% value will be considered.

If considered and invested post a good research, ULIP are one of the best investment options today. They not only offer you insurance cover but also help you in growing your wealth. You should always consider the goals that you have in mind for yourself and your family before deciding on a particular plan. Keeping an open and alert mind while making a decision will prove to be a really fruitful idea later.

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