Frequently Asked Questions on ULIPs

Mumbai, September 23, 2020

Unit-Linked Insurance Plan (ULIP) offers dual benefits in a single product. The advantage of life insurance coverage and the opportunity to invest in equity, debt, or balanced funds to earn returns over the long-term make ULIP a popular investment instrument. ULIPs offer better returns than most of the other investment alternatives. They help you secure your family’s financial future or meet specific life goals. However, people have various questions in mind regarding ULIPs.

Investors frequently ask questions related to the ULIP meaning, its returns, the risk associated with the investment, and withdrawal options, among other queries. Here is a list of the most common questions and appropriate answers to eliminate your misconceptions about this product.

1. Is ULIP a good investment instrument?

Yes, ULIP is a promising investment option if you are willing to remain invested for the long term. It is a great wealth creation tool that helps accomplish long-term financial goals, like your child’s education and wedding or buying a house. The dual benefits of insurance and investment in one plan make it a worthy investment avenue.

2. How does a ULIP work?

The premium that you pay towards ULIP gets divided into two sections. A part of the premium is invested in equity, debt, or balanced funds as per your preference, whereas the other half secures your life insurance. Once you invest the money, you receive units according to the sum of investment. The value of each unit is referred to as the Net Asset Value (NAV). Based on the underlying assets' performance, each unit's value may increase or decrease, and it is reflected in the ULIP NAV.

3. Is ULIP tax-free?

Yes, ULIP is a tax-exempt investment instrument. The premium that you pay towards the ULIP plan qualifies for a tax deduction under Section 80C of the Income Tax Act, 1961. The maximum permissible deduction is INR 1.5 lakh per annum. Besides this, the maturity amount that you receive is tax-free as per Section 10 (10D) of the Act.

4. What is the lock-in period?

ULIP has a mandatory lock-in period of five years. It means that you cannot withdraw funds before this tenure.

5. When can you withdraw funds from ULIP?

 Withdrawal before lock-in period of five years

If you surrender the policy or stop paying the premium during the lock-in duration, the insurer will transfer your investment to a discontinuance fund and levy charges. You will receive the accrued investments after the policy completes five years. Partial or complete withdrawal is not allowed before the lock-in tenure gets over.

 Withdrawal after lock-in tenure of five years

After the completion of the compulsory lock-in tenure, it is advisable to withdraw a partial amount and stay invested for a long duration. Some insurance companies may allow withdrawal of up to 10%, whereas others may permit 20% of the total premium paid.

6. Does ULIP provide guaranteed returns?

Equity-based ULIPs are correlated with the market’s performance. Therefore, they do not give any assured returns. You can stay invested for 10-15 years and reap the benefits of compounding to maximize the returns on investment.

7. Can you invest only in equity funds?

No, with ULIPs, you have the flexibility to invest in balanced and debt funds apart from equity funds.

This enables you to invest as per your risk-taking ability and benefit from market uncertainties to build a substantial corpus.

8. How does a ULIP calculator help?

A ULIP calculator determines the approximate returns that you will receive on the maturity of a ULIP. All you have to do is enter the amount you are willing to invest, the frequency of premium payment, the term of the policy, and the type of fund. A ULIP calculator will then help you ascertain the expected returns on a specific premium.

Now that you have answers to your doubts, investing in a ULIP plan can prove to be a wise decision. Benefits like flexibility, transparency, attractive tax benefits, and goal-based savings make ULIP a lucrative investment product.

(Disclaimer: This is branded content. Readers are advised to exercise due discretion before entering into any correspondence, investment, purchase or business dealings on the basis of this content.)


Related Stories