Unit-linked Insurance Plans can be said to be popular among those looking for a way to potentially grow their finances while also having in place a layer of security. In such plans, the investment opportunity lies with the policyholder, offering them a chance to benefit from market-linked returns. Yet, many remain curious about how a ULIP plan truly aligns with their long-term objectives and whether it’s the right fit.
Let’s explore the most common FAQs about ULIP and get the much-needed clarity. By understanding the basics and beyond, you can feel more confident about this distinct financial tool.
ULIP FAQs
What are ULIPs?
A ULIP, or Unit Linked Insurance Plan, is a unique policy that combines insurance coverage with the market-linked potential of wealth creation. A portion of the premium you pay goes toward a life cover. The remaining amount is invested in ULIP funds—ranging from equity to debt or a balanced mix—based on your preferences and risk appetite. This structure may help you pursue long-term financial goals and enjoy the flexibility of switching funds when market conditions change. In a ULIP plan, the investment risk is generally borne by you, and the returns often depend on prevailing market performance.
What are Units?
In a ULIP plan, every premium you pay is divided into several individual parts known as units. Each unit represents a fractional share of the underlying Fund in a Unit Linked Policy. Collectively, these units form your total holdings, reflecting your share in the fund’s performance and potential growth.
What is Net Asset Value?
Net Asset Value, or NAV, is the per-unit price of a ULIP fund and is measured in rupees. This value changes daily based on market fluctuations. By tracking NAV, you can assess how your ULIP fund is performing and plan your financial moves accordingly.
Do ULIPs offer tax benefits?
Yes, a ULIP plan typically offers valuable ULIP tax benefits. First, your premium payments of up to ₹1.5 lakh per year can qualify for deductions under Section 80C. Additionally, the payout to your loved ones in case of an untimely demise is tax-exempt under Section 10(10D), subject to certain limits. ULIPs can also be free from LTCG tax on maturity, providing even more financial advantages. These benefits extend to various coverage options and add-ons such as critical illness riders and top-ups, making ULIP funds appealing for individuals seeking disciplined wealth creation.**
What is a fund switch?
A fund switch in a ULIP plan lets you reallocate your existing ULIP funds between equity, debt, or a blend of both, depending on your changing goals and risk appetite. This feature helps you manage market fluctuations more effectively and adjust your strategy as you progress through different life stages. Many insurers allow a certain number of free fund switches per year, after which ULIP charges may apply. Some even provide unlimited switches at no additional cost. By using the switch option wisely, you can potentially optimise your returns while keeping your investments aligned with your preferences.
What is premium redirection?
Premium redirection is a key feature in a ULIP plan that lets you channel future premiums into a new fund while keeping earlier premiums invested in their original allocations. This way, you can adapt your strategy without disturbing your existing ULIP funds. Much like a fund switch, premium redirection helps you respond to changing market conditions and personal goals. However, be mindful of any limits set by your insurer and potential ULIP charges.
Can I surrender the policy before the lock-in period is over?
Yes, it is possible to surrender a ULIP plan even before its five-year lock-in period, although surrender charges are applicable. While you may initiate the surrender request at any point, the payout is released only after completing five years. Meanwhile, your funds are transferred to the Discontinued Policy Fund, where they typically earn a stipulated interest rate (usually around 4%). Surrender penalties vary from one product to another, but regulations cap these charges to safeguard policyholders. Though early discontinuance is allowed, staying invested for at least ten years may help optimise potential benefits and returns from your ULIP plan.
What is the death benefit in a ULIP?
In a ULIP plan, the amount your loved ones receive in the unfortunate event of the life assured’s passing away, depends on the premium payment option chosen.
In case of death of the Life Assured, higher of the following values is payable:
- Pre-determined Sum Assured value minus the partial withdrawals made during
- Fund Value
- An additional amount equal to sum assured subject to a maximum value
All the above three payouts are subject to terms and conditions.
a. With ULIP taxation benefits, your family’s payout can also be exempt under certain tax provisions, making this arrangement more advantageous than many realise.**
What is the maturity benefit in a ULIP?
The maturity benefit of a ULIP plan is the total fund value you’ve built up by the end of the policy term. This amount, which may include any bonuses, often remains free from LTCG tax and can be eligible for deductions under Section 80C.**
Do ULIPs allow partial withdrawals?
After the five-year lock-in period, you may withdraw up to 20-30% of your ULIP funds. This partial withdrawal option is free of cost and can be done multiple times as long as the cumulative withdrawal doesn’t exceed 20-30% annually. The ULIP plan remains active, but it’s vital to monitor how such withdrawals may affect your overall returns.
After reading the answers to the above ULIP FAQs, you might now have a clearer understanding of ULIP charges and taxation. A ULIP plan can be tailored to your future goals, letting you balance coverage and potential gains. You can utilise a ULIP return calculator to help you decide the right premium amount and coverage required. With many tax benefits available, ULIPs remain a viable option for many. You can learn more about financial planning with ULIPs or consult an expert to ensure your financial strategies align with your needs. A well-informed approach can help you reap the true rewards of ULIP investments.**
** Tax exemptions are as per applicable tax laws from time to time.
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