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Benefits of ULIPs

ULIP is an insurance and investment tool combined into one plan. ULIPs assist you in protecting your loved ones while you are away, and they also help you invest your money to reap good returns and secure the future. ...Read More

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Benefits of ULIPs

Understanding Benefits of ULIP Plans

Understanding the Advantages of ULIP Plans
January 03, 2025

Table of Content

 

What are ULIPs?

Unit linked Insurance Plans (ULIPs) are a life cover that offer twin benefits in the form of financially protecting your family in the event of your unfortunate demise and the investment to achieve your long-term goals. The policyholder pays two portions of the premium for a ULIP, and that contribution is invested in the fund of your choice after part of it is paid towards your life insurance plan. Depending on your objectives & risk tolerance, you, as a policyholder, can invest in debt, equity, or both.

ULIPs open up the opportunity for you to invest in various market-related securities that ultimately help achieve long-term investment financial objectives.

Now if you are wondering how ULIP works, let us simplify that for you. Two portions of your premium are invested, one of which, depending on the state of the market, is allocated to debt, equity or hybrid mutual funds. And life insurance coverage is purchased with the other portion.

In terms of investing, ULIPs are like mutual funds. It is invested in debt, equities, or a mix of both; you can select a plan or change between several. You are given units in line with your investment, just like mutual funds. Professional fund managers handle unit-linked plans and monitor market changes closely so that they are able to invest the necessary amount of your premium appropriately.

What are some of the main characteristics of a ULIP?

ULIP is an insurance and investment tool combined into one plan. One of the big benefits of ULIP is that they assist you in protecting your loved ones while you are away, and also invest your money to reap good returns to secure the future.

These are some of the main characteristics of the investment cum insurance plan called ULIP.

  • The ULIP plan is not affected by early partial withdrawals.
  • ULIP allows flexibility in switching between equity, debt, or balanced funds.
  • Your investment needs will determine the premium and sum assured for a ULIP.
  • With a ULIP, you can monitor the performance of your investment and observe how the changes in the market affect the money invested, i.e. whether it is growing or not.
  • The ULIP plan allows you to switch between funds to enable higher returns.
  • Being an investing tool, ULIPs carry some degree of risk.
  • ULIPs have a five-year lock-in period.

Top 6 Benefits of ULIP

Here are the key ULIP advantages that you must be aware of:

  • Investment Flexibility

ULIPs provide great investment flexibility, allowing money to be moved around at any time. With ULIPs, it is possible to transfer money from equity funds to balanced or debt funds and vice versa. Upcoming premiums can also be shifted to a different fund of choice. Additionally, there is an option to top up the ULIP with more money later if desired. In certain situations, a portion of the investment can be withdrawn for financial emergencies without affecting the entire ULIP plan.

  • Insurance and Investment Combo

ULIPs are an insurance cum investment scheme. Regular premium payments are required of you as a policyholder of ULIPs, and a part of those premium payments goes towards life insurance plan coverage. The other part is combined with the assets from other policyholders and, like mutual funds, invested in financial instruments (equity and debt), thus giving you the twin benefits of insurance as well as investment.

A part of your premium is invested in debt, equities, or a mix of both. You are given units in line with your investment, just like mutual funds. Professional fund managers handle unit-linked plans and monitor market changes closely so that they are able to invest the necessary amount of your premium appropriately.

  • Transparency

A big advantage of ULIPs is that they are very transparent investment products. Regular performance reports on the investments of policyholders include information on the fund, Net Asset Value (NAV) and any related fees. The communication of such transparent information is what enables knowledgeable decision-making for ULIP investors.

Such a high degree of transparency not only gives investors greater control over their money invested in ULIP but also helps them make decisions, such as fund switching, as per their fund's performance and financial goals.

  • Income Tax Benefits

Just like term life insurance, PPF, ELSS and many other insurance and investment products, ULIPs also offer income tax benefits. The premium paid against a ULIP plan is eligible to be claimed for a tax deduction under Section 80C, upto an overall limit of Rs 1.5 lakh per financial year. Also, the returns from the ULIP policy upon maturity are exempt from any tax under Section 10(10D)*.

Additionally, policyholders can switch between funds under a ULIP without having to pay any taxes.

  • Potential for Higher Returns

Given that a portion of your ULIP premium payment goes towards investment in market linked securities like debt and equity, ULIP offers the opportunity to fetch higher returns. Fund managers of ULIPs allocate a portion of your premium payment into market-linked instruments such as debt and equity instruments, which widen the scope of fetching higher returns than other sub-optimal investment avenues such as bank FDs or PPF.

As a policyholder, you can maximise the higher returns potential of ULIPs by starting to invest early, switching funds in a timely manner whenever necessary, being consistent with investment, and reviewing your fund performance regularly.

  • Fund Switching

The fund switching facility of ULIPs is what enables them to offer a high degree of investment flexibility. Under ULIPs, you can switch between funds to move your money from equity funds to balanced funds and debt funds or vice versa.

Most insurance companies tend to offer a fixed number of free switches in a particular year, and for any additional switches beyond that, you need to pay a small fee.

Also, you have the option to switch the upcoming premiums to another fund of your choice, besides having the option to top up your ULIP if you want to invest more money in upcoming period.

Why should you invest in a ULIP?

  • The Flexibility of ULIPs

Flexibility to pick your fund option: Most ULIPs offer a selection of balanced, debt, and equity fund options. You may thus invest your money according to your expected return and risk tolerance. To help you achieve the best returns, ULIPs also allow you to transfer your money between several funds.

Adjustable Life Cover: ULIP allows you to select your sum Assured* at the start of your policy. To meet your protection needs at various life stages (e.g., marriage, childbirth, etc.), some ULIPs also let you raise your Sum Assured over the course of the policy.

Flexibility in modifying your premium investment amount: ULIs also let you pay a top-up amount in addition to your current premium. Utilising this choice will maximise the profits of your investment.

Flexibility to choose a rider: Riders are extra protection options and customisable elements of your ULIPs. The Unit Linked accident and disability benefits rider is one of the most often occurring riders. It raises the amount of Life Cover the family will get in the case of an untimely death. It also makes sure that, should an accident render you disabled, your Life Cover will still apply.

  • ULIPs Provide Transparency

Product Brochures and Key Feature Documents: You should be aware of other features and benefits provided by ULIPs even though benefit illustrations are very helpful in elucidating the quantifiable aspects of ULIPs.

To grasp the specific benefits of your policy, you can read the product brochure. You will receive a key feature document outlining the main aspects of the plan once your policy is issued. This guarantees that you fully understand the plan you have bought, as does the product brochure.

Free-Look Period: ULIPs and the majority of life insurance plans have one. If you are unhappy with your policy, you usually have a 15-day window to cancel it. Once all applicable fees, as specified in the policy, are subtracted, you will receive your full premium back.

Net Asset Value (NAV): Regular performance monitoring of your policy is crucial. Every day NAV updates are published by the company to assist you in this. NAV is the cost at which a fund's units are bought. The NAV value's increase or decrease indicates how well your funds are performing.

  • Goal-Based Savings Encouraged by ULIPs

You have to save in order to achieve your major life goals, such as buying a house, paying for your kids' college education, or guaranteeing a nice retirement. One of the most sensible approaches to starting long-term systematic investment options is through ULIPs.

ULIPs enable you to make disciplined investments of your money and are designed to address important financial goals. Lack of such a strategy runs the danger of sacrificing your long-term objectives to meet immediate demands.

  • Tax Advantages of ULIPs

The premium paid towards a ULIP is eligible to be claimed as a tax deduction under Section 80C, upto an overall limit of Rs 1.5 lakh per financial year. Also, the returns from the ULIP policy upon maturity are exempt from any tax under Section 10(10D)*. Also, policyholders can switch between funds under an ULIP without having to pay any taxes.

  • ULIPS Provide Liquidity

A partial money withdrawal is one of the features of ULIPs following the 5-year lock-in period. This function enables you to take out a predetermined amount of money from your policy when you need it.

This guarantees that, should something go wrong, you are financially ready. Furthermore, you can take out the money at different times to suit your requirements.

But to save for an emergency, it's best to keep your money in your ULIP to help you meet your long-term financial objectives, such as paying for your child's education, purchasing a home, and more.

When is the Right Time to Invest in ULIP?

Before you plan to start investing in Unit-Linked Insurance Plans (ULIPs), you should consider the following situations to ascertain whether it is the right time for you or not. Doing so will help you reap the maximum benefits of ULIPs: 

  • Understanding Your Risk Profile:

Understanding your existing risk profile based on your ongoing investments helps you understand where you stand on your overall risk appetite. ULIP investments do come with market-linked risk. Hence, based on your present risk profile, financial planning and risk appetite, you can decide whether it is the right time for you to invest in a ULIP and also how much.

  • Ideal Timing:

ULIPs help cater to your long-term financial goals. Hence, it is important to understand that the ideal time for entering ULIP investments would be the one when you can commit funds to such a long-term investment. That would be possible when you have a stable income source. This will help you reap ULIP plan benefits like wealth creation and life insurance coverage.

  • Market Conditions:

Ongoing market volatility, conditions and fund performance play a vital role in shaping your ULIP returns. It is difficult to time the market perfectly, but if you are investing during market corrections you can enhance your returns significantly, thus, encashing on ULIP benefits over time.

  • Investment Strategy and Goals:

You must always make sure that whatever be your investment it should be aligned to your financial goals. These could be buying a house, child education, retirement planning, or wealth accumulation. By choosing the right fund mix, you can unlock the benefits of ULIP policy, including tax savings and flexible fund switching.

How to Choose the Right ULIP Plan?

The gain maximum advantages from your ULIP investment, you must go over and beyond choosing the best plan. Here are some factors to consider while buying your ULIP to ensure maximum ULIP policy advantages:

  • Assess Your Financial Goals:

Define your short-term and long-term financial objectives. Whether it's funding a child's education or building a retirement corpus, align your ULIP choice with these goals to maximise the benefits of ULIP investment.

  • Understand ULIP Types:

ULIPs offer various fund options such as equity, debt, or balanced funds. Choose a fund type that matches your risk appetite and return expectations. This will help you leverage market-linked returns effectively while enjoying risk coverage.

  • Compare ULIP Charges:

ULIPs come with costs like mortality charges, surrender charges, and fund management fees. Comparing these costs across plans ensures that you achieve optimal value without unnecessary expenses. Having information about ULIP charges promotes transparency, which is crucial for accurate and personalized decision-making.

  • Check Plan Flexibility:

A good ULIP provides flexibility in premium payments, ULIP top-up features, and partial withdrawals. These aspects enable you to adapt your investment to changing financial needs while enjoying added tax benefits. You must also consider factors like the lock-in period and your ULIP surrender benefits to understand disadvantages if any that come with early withdrawal. By assessing these factors, you can choose a ULIP that offers the right balance of premium affordability, flexibility, and Best ULIP benefits for long-term growth.

Conclusion

Since ULIPS uniquely combines investment and insurance elements together, they are a flexible financial tool. The dual nature of ULIPs helps policyholders create wealth and provide insurance protection from one single plan. The key features of ULIPS that facilitate comprehensive financial planning include market-linked returns, fund selection flexibility, transparency, and a set lock-in period.

To optimise the returns and benefits of ULIP investment, though, you, as a policyholder, must regularly monitor and evaluate your plans to make sure they fit your risk tolerance and financial objectives. ULIPs offer investors seeking a balanced approach that supports both life cover and long-term economic growth, as well as a dynamic and customised solution.

FAQs on Benefits of ULIP

Q. How long is the lock-in period for ULIPs?

ULIPs currently have a lock-in period of five years. In 2010, the IRDAI (Insurance Regulatory and Development Authority of India) increased ULIP's lock-in period from three years to five years. This longer lock period of ULIP is often considered a disadvantage.

Q. Can I switch between funds in a ULIP?

Yes. The fund switching facility of ULIPs enables them to offer a high degree of investment flexibility. Under ULIPs, you can switch between funds to move your money from equity funds to balanced funds and debt funds or vice versa. Most insurance companies tend to offer a fixed number of free switches in a particular year, and for any more additional switches beyond that, you need to pay a small fee.

Q. Is ULIP better than FD?

Given that ULIPs involve investment in market linked securities like equity and debt, they possess a higher scope of better returns than bank FDs.

Q. Are ULIP returns guaranteed?

As ULIPs involve investment in market linked securities such as equity and debt, they do not offer guaranteed returns.

Q. Is ULIP better than Mutual funds?

Just like mutual funds, ULIPs involve investment in market linked securities like equity and debt. This makes it likely that the returns of ULIPs can be similar to those of mutual funds.

Q. What is the maturity benefit of ULIP?

The maturity benefit in ULIP is the fund value that gets accumulated during the policy term and is subsequently paid to the policyholder upon maturity. It is influenced by the funds chosen and the market performance over time. It involves two components - financial returns and insurance coverage.

Q. How do ULIPs help with retirement planning?

ULIPs help with retirement planning by combining long-term investments with life insurance. They allow wealth accumulation through market-linked funds while providing flexibility to switch funds, ensuring financial stability and security during retirement.

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Francis Rodrigues Francis Rodrigues

Francis Rodrigues has a decade long experience in the insurance sector, and as SVP, E-Commerce and Digital Marketing, HDFC Life, manages the online sales channel, as well as digital and performance marketing. He has had hands-on experience in setting up sales channels and functional teams from scratch over a career spanning 2 decades.

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Vishal Subharwal Vishal Subharwal

Vishal Subharwal heads the Strategy, Marketing, E-Commerce, Digital Business & Sustainability initiatives at HDFC Life. He is responsible for crafting and ensuring successful implementation of the overall organisation strategy.

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Here's all you should know about ULIP insurance.

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Understanding Taxations in ULIP
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Disclaimers

* The afore stated views are based on the current Income-tax law. Tax Laws are also subject to change from time to time. Also, the customer is requested to seek tax advice from his Chartered Accountant or personal tax advisor with respect to his personal tax liabilities under the Income-tax law.

The Unit Linked Insurance products do not offer any liquidity during the first five years of the contract. The policyholders will not be able to surrender or withdraw the monies invested in Unit Linked Insurance Products completely or partially till the end of fifth year.

Unit Linked Life Insurance products are different from the traditional insurance products and are subject to the risk factors. The premium paid in Unit Linked Life Insurance policies are subject to investment risks associated with capital markets and the NAVs of the units may go up or down based on the performance of fund and factors influencing the capital market and the insured is responsible for his/her decisions. HDFC Life Insurance Company Limited is only the name of the Insurance Company, the name of the company, name of the contract does not in any way indicate the quality of the contract, its future prospects or returns. Please know the associated risks and the applicable charges, from your Insurance agent or the Intermediary or policy document of the insurer. The various funds offered under this contract are the names of the funds and do not in any way indicate the quality of these plans, their future prospects and returns.

ARN - MC/12/24/19722