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29 March, 2024 13:00 IST
Financial Planning
   
ULIP`s - Good option for long term
Source: IRIS (04-APR-14)

There are a lot of financial instruments available in the market today in which one can invest, and one of the best ways to invest for the long term is to purchase a Unit Linked Insurance Policy (ULIP). This is a product which combines both insurance cover and investment. You can look at ULIPs as term cover plus mutual funds. These are good for more than 8 years goals.

A ULIP provides financial protection along with investment opportunities - giving the investor the best of both worlds. ULIP policy holders are allotted units and each unit has a net asset value (NAV) that is declared on a daily basis. The NAV is the value based on which the net rate of returns on ULIPs are determined. The NAV varies from one ULIP to another based on market conditions and the fund's performance.

Since this is a combination of both an insurance policy as well as a mutual fund, a certain part of the corpus goes towards the insurance premium while the remaining portion is invested in selected equity and debt schemes. Policy holders have the option of selecting the type of funds (debt or equity) or a mix of both based on their investment need and risk appetite, similar to investing in a mutual fund. Policy holders can also switch between investment plans of the same insurance company to suit their current investment needs.

Why are ULIPS a good Investment:

> Reduced Charges: After the 2010 guidelines, the charges on ULIP's have been capped. The difference between the net yield and the gross yield cannot exceed 3%.

> Lower Recurring Cost: At 1% - 1.5%, ULIP's have a lower fund management charge than mutual funds, where the expense ratio is typically between 2% - 2.25%.

> Goal Based Savings: Long-term systematic investment options designed to address key financial goals help you cultivate a disciplined savings pattern which ensures that the money being set aside will go towards the fulfillment of the
specific objective. 

> Triple Benefit - Life Cover, Wealth Creation and Tax Savings: All 3 aspects are bundled into one product. It is a good product for investors who don't want to invest in multiple products.

a) Death Benefit - In case of death of insured, the Sum Assured is released to the beneficiary.

b) Maturity Benefit - On maturity of ULIP plan, the fund value along with bonuses if any, is provided to the policyholder.

c) Tax Benefit - ULIP also offers tax benefits under Section 80C of the Income Tax Act, 1961. The premium paid is deductible from taxable income for maximum amount of Rs 100,000.

> Tax Efficiency: Tax-free Income if policy offers a cover of 10 times the annual premium. No tax implication while switching from one investment option to another.

By selecting the right ULIP one can have multiple benefits, and even have the option of changing the investment option (debt/ equity/ large-cap/ mid-cap/ etc.) within the same insurance house at a nominal or no charge. The cost structures are lower in a ULIP as compared to a mutual fund which make it a more attractive option in the long run. However it is advisable to invest only money that is meant for long term savings in ULIPs as there is typically a 5 year lock in period.

Summary:

> If you are considering long term investment, ULIP is excellent means to securely invest your savings.

> ULIP provides insurance cover, investment and tax benefits.

> ULIP is also flexible as you can systematically invest the invested amount in any type of fund.

> ULIP does not require your constant attention as your premium is managed by industry professionals.

(Contributed by Anil Rego, CEO & founder, Right Horizons)


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