ULIPs – Boon or Bane?

Unit-linked insurance plans (ULIPs) are products that provide risk cover as well as an investment opportunity to the investors. The investments are made is different assets, such as bonds, equity, or mutual funds.


The returns on ULIPs are linked to the performance of the investment portfolio. The risks associated with such investment are borne by the investors. Considering the risk appetite and future fund requirements while investing in ULIPs is advisable.


Because the returns are based on the market conditions, several people debate whether these products are a boon or bane.


Here are five reasons ULIP investments is considered to be a boon:


1.   Tax-free returns

These investment plans offer tax-free returns as well as additional tax benefits. The capital invested in these products is eligible for income tax deductions under section 80C of the Income Tax Act. In addition, the benefits paid to the beneficiaries on the demise of the policyholders are completely tax-free. The policyholders have the advantage of receiving the assured benefits or investment value, whichever is higher. This amount is also tax-free, which effectively results in a high return on investment.


2.   Combination of investment and insurance

The ULIPs provide dual benefits of life insurance and investment. This means the beneficiaries of the individuals have the security of receiving the benefits in case of their demise. In addition, they have the opportunity of earning higher returns by investing in different financial products. Moreover, individuals are able to adopt a disciplined approach to regular investment and savings, which is vital for creating wealth over a longer period of time.


3.   Flexibility

The financial objectives of a person change over a period of time. The best investment plan is the one that allows making modifications as per the changing objectives. ULIPs offer this flexibility of switching between funds to suit their varying requirements. In addition, investors are able to benefit from the positive movement of stocks and switch among various options, such as cash, debt, or equity. The policyholders may also choose monthly programmed switches if they are unsure of how to monitor the fund performance. Under this option, a pre-determined amount is switched on a specified date.


4.   Partial withdrawals allowed

At the end of the lock-in period, the investors are allowed to make partial withdrawals as per the terms and conditions mentioned in the policy document. These withdrawals are not taxable and offer the individuals an option to meet certain financial objectives or liquidity emergencies.


5.   Good returns

Based on the fund chosen, investors are able to enjoy good returns on their investments. For example, if a person chooses a fund that invests a substantial portion of the corpus in the stock market. If the capital market performs well, the individual is able to make significant returns on his ULIP investment.


Although there are several reasons why ULIPs are a boon, here are two disadvantages of such investments:


1.   Expensive

Because ULIPs provide insurance coverage and investment, the premium for the life cover becomes expensive compared to regular term plan. Moreover, there are several charges, such as management fees, investment expenses, and others that make investment in ULIPs an expensive option. This may make it unviable for investors to redeem their investments at the end of the lock-in period due to the fund value being low.


2.   High cost in initial phase

The ULIP providers levy a higher policy charge, which makes the investment costlier in the initial period. Additionally, some insurance companies offer free switching between funds. However, some charges may be levied after a certain number of free switches are completed.


The unit-linked insurance plans have certain pros and cons. Selecting the best investment plan in India must be based on the age of the investors and their financial objectives at various stages of lives. Some experts recommend separating insurance and investment. Nonetheless, ULIPs offer several benefits under one plan, which include life cover, higher returns, and tax savings. This is why it is prudent to invest in a good ULIP for maximizing the benefits.

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