Unit Linked Insurance Plans, or ULIPs, are market-linked instruments for investment that bring with them a multitude of benefits for investments in the money market and life insurance. These hybrid investment plans bring the best of both worlds, reducing the volatility in investment in either segment.
One part of your premiums in ULIPs goes into a market-linked product of your choice, and the other goes into life insurance. This hybrid structure presents a lot of questions; the primary one being are ULIPs a worthy investment? Let’s look at both the good and the bad to make an informed assessment.
Advantages of Unit Linked Insurance Plans
During the COVID-19 era, the line between insurance and investments has blurred for many people. However, ULIPs bring in a unique solution of combining both and removing that line. Here are some of the main advantages of investing in Unit Linked Insurance Plan:
1. Long-Term Returns
ULIPs operate at the power of compounding. This makes them a valuable asset in getting high returns over a long time horizon compared to FDs and hoarding money in savings accounts. For instance, you will get far better returns for your investment in ULIPs if you exit the policy after 7 years compared to only saving the money and not investing it during the same time period.
2. Provides Tax Benefits
Very few investment policies provide you with tax benefits. Since ULIPs are hybrid policies and also have life insurance as a part of the policy, they can provide you with tax deductions. Under Section 80C, you can avail tax rebates for ULIP premiums. However, this tax benefit is only available for investors whose annual premium on a ULIP is below 2.5 lakh rupees based on the new updates in the 2021 Budget.
3. Flexibility in Investment
One of the most attractive features of ULIPs is their flexibility as a policy. ULIPs provide the investors with the choice of switching between their funds in the policy based on the outlook of the market. You can seamlessly switch between equity and debt funds based on how well the market is performing.
Disadvantages of Unit Linked Insurance Plans
While ULIPs come with a fair share of extravagant benefits, they also have some shortcomings. Let’s explore what they are:
1. Long Lock-in Period
One of the biggest downsides of investing in a ULIP is the minimum lock-in period of 5 years. While you can surrender your policy before this period ends, you would still have to wait to withdraw your money after this duration is over.
2. Complexity of ULIPs
Since ULIPs are both an investment and life insurance, it might be a tough task for new investors to get acquainted with how they work. You would have to constantly keep track of the Net Asset Value of your fund and have to make decisions about redirecting or switching your funds so you can make the most returns out of the ULIP.
3. Charges for Switching Funds
While the flexibility to switch funds is an advantage, it can also prove to be a disadvantage after a certain point. Insurers will offer the investors free switches only a certain number of times. After you’ve crossed that threshold, they will charge you for switching funds.
Now that we have gone through the good and the not-so-good aspects of ULIPs, it is evident that the benefits outweigh the downsides. ULIPs are a smart commodity to invest in, but should be navigated carefully to avoid any unpleasant surprises.