In today’s volatile scenario, with fluctuating returns from financial instruments, every investor is looking to maximize returns, with minimum risk. Further, there is a plethora of investment options and miss-selling of products by agents, with each claiming to offer the highest returns. For a common investor, selecting the right investment option, suited to his needs of market-linked returns, insurance cover, assured sum on maturity, low risk and tax benefits can be a daunting task. To meet all of the above requirements, Unit Linked Insurance Plans (ULIPs) have emerged in a new, comprehensive, low-cost avatar, commonly referred to as 4G ULIPs.Also, insurance companies have developed a ULIPs return calculator to compute the amount to be invested today in order to obtain the desired maturity value, along with expected premiums. This has significantly eased the decision-making process of investing in ULIPs. We shall now try to understand these new age ULIPs, its benefits, know how to select the best ULIP plan and how the returns are computed.
Meaning of ULIP
Unit Linked Insurance Plan (ULIPs) are investments products with life insurance, whereby the investors can invest in equity or debt over a long-term period. The regular premiums paid are allocated between investment and mortality charge towards life cover.
Benefits of ULIPs: With its inbuilt flexibility in investment avenues and tax exemptions, ULIPs are fast becoming the preferred investment options for the ‘smart’ investor. We shall not look into the advantages that ULIPs offer over other investment products:
- Low cost, viable option: The transformed 4G ULIPs entail significant savings on premium allocation charges and commission charges. This enables systematic, a regular investment like SIPs and market-linked returns at negligible costs.
- Tax advantage: The maturity sum from ULIP investment is exempted from tax under Sec 10 (10D) of the IT Act, 1961. There is also a tax waiver on the premium payment under Section 80C of the IT Act, 1961 up to a limit of Rs1,50,000. All of these ULIP benefits have captured the attention of money-conscious investors.
- Payback of mortality charges: Certain innovative ULIP plans have come out with market disrupting return of mortality charge. These reformed plans effectively result in a free life insurance cover, along with the complete investment of the premiums paid. This has the potential to generate high returns.
- Switching between funds: Under ULIPs, one can invest in equity or debt alternatively in the ratio of one’s preference, so as to obtain optimum returns from a choice of 4-8 funds. This enables a prudent investor to make a timely exit from the fund and prevent losses.
- Long term planning with no long-term capital gains tax: ULIPs facilitate long term financial planning without the tax implication of long term capital gains. This is because ULIPs is primarily an insurance product with add-on investment features.
How the returns are computed: ULIPs function on similar lines to mutual funds.ULIP Net Asset Value (NAV) is calculated by cumulatively adding all the ULIP holdings on a particular day and excluding the liabilities, namely operating expenses, marketing expenses, management fees, and other charges. The ULIP NAV is a useful metric that helps evaluate historical fund performance and indicates future fund performance.
A ULIP offers attractive returns to the investor along with life protection. However, there are several types of ULIPs available, depending on the investment goal and financial position of the individual. Hence, to select the best ULIP plan, suited to one’s needs, one must select a comprehensive plan that invests in diverse asset classes, with minimum charges, flexibility in premium payment structure and switching between funds from equity to debt and vice versa. Experts have recommended a ULIP that offers 6-8 fund options. However, the most important criterion is to go for a plan that gives reasonable returns at the time of maturity, by way of a sizeable lump sum amount that can be used during your retirement years, which is marked by the absence of regular income.
The availability of a tax-free corpus from ULIPs on maturity to meet unexpected financial needs is definitely a plus. With growing awareness of the diverse benefits of ULIPS amongst the investor community, it is destined to become the smart investment option in 2019.