How Secure is it to Invest in a ULIP Policy?
You might plan to shift your investment from traditional investment policies to alternate investment policies. ULIP stands for Unit Linked Insurance Plan,which is a mix of insurance policies and mutual funds. The ULIP insurance policy cover is generally 10 times the annual premium, but you can increase the ULIP Insurance cover to even 40 times the annual premium or higher. ULIPs are safe investments, as they are controlled by the statutory body, Insurance Regulatory and Development Authority of India (IRDA).
ULIP policy is a mixture of insurance policy and mutual fund. So, if you are planning to diversify your investments and want to enjoy growth as well as the protection of an insurance policy, then you can opt for ULIPs. In traditional insurance policies, you get life protection and receive a fixed lump sum on the maturity of the insurance policy. In the case of ULIPs, the return is not fixed. You can receive a higher or lower benefit at maturity, depending on the market condition at the time of the maturity.
ULIP insurance is similar to the life protection offered by traditional life insurance policies. Upon the demise of the policyholder, the beneficiary will receive the agreed insurance cover. The insurance cover can be decided by the policyholder. If you want to increase the insurance cover, you will have to pay a greater premium.
What is ULIP NAV?
ULIP NAV is the price at which you will buy or sell ULIPs. If the price of the ULIP during the purchase was INR 100 and you sold it for INR 120, you make a profit of INR 20. So, NAV helps investors understand the gain or loss from ULIP investment. The ULIP NAV is decided from the market price of the financial assets that ULIP funds hold. If the market price of the holdings increases, then the ULIP NAV will also increase and vice-versa.
Types of ULIP Funds
When you pay a premium for your ULIP policy, the money is used to provide life cover and manage ULIP insurance funds. The ULIP insurance fund is managed by professional fund managers. The type of ULIP fund will depend on the type of investment made by the ULIP fund.
There are three types of ULIP funds.
- Equity Linked ULIP Fund
In Equity Linked ULIPs, the fund will invest all the accumulated money in equity securities. So, this kind of fund is generally more volatile. It changes with the volatility of the stock market and is considered a bit risky. Historically, the return of Equity Linked ULIPs has proven to be higher than other kinds of ULIPs.
- Debt Linked ULIP Fund
Here, the fund will invest only in debt securities. The debt securities will range from government debt to corporate debt. This is considered to be the safest as the volatility of the return is less.
- Balanced ULIP Fund
This is a mixture of debt and equity. The percentage of allocation between debt and equity lies in your hand, and you can do free switches a limited number of times in a year.
Why are ULIPs Secured?
There are several benefits of ULIP:
- As you are planning to shift from traditional investments to market-linked investments, it is always safe to invest in ULIPs. ULIPs offer insurance and a fund that is managed by experts. So, without taking unnecessary risks, you will enjoy good profits.
- The returns offered by ULIPs historically have been better than traditional insurance policies. Traditional insurance policies provide fixed returns, whereas ULIPs help you enjoy market gains.
- ULIPs have a lock-in period. So, it inculcates a savings habit. Once you know that you can’t withdraw the money, you start to ration your expenses.
- It gives you the flexibility to choose between debt and equity investments and switch as per the market conditions.
- ULIP provides you with tax benefits, both during the payment period and maturity. The annual premium helps reduce tax liability under 80C every year, and the maturity amount is tax-free under 10D if the premium paid in any year doesn’t exceed Rs 2.5 lakh.
ULIPs are safe and secured investments controlled by IRDA. If you have a longer time horizon, ULIPs are the best option, as they will help you enjoy the market returns.