What is Unit Linked Insurance Plan?
A Unit Linked Insurance Plan is an
insurance type of policy that gives insurance coverage as well as investment
options. In Unit Linked Insurance Plan a sum of the amount or
premium paid by the investor goes towards life insurance and the remaining
amount is invested in several funds like equity, debt fund etc., or depending
on the investor’s risk bearing capacity and investment long term goal. It has
locking period of 5 years, it is a time were investor’s money started growing.
Some of the key features of Unit Linked
Insurance Plan:
Insurance Coverage:
Unit Linked Insurance Plan life
insurance coverage to the policyholder, in case of demise of the policy holder
during the policy term period, dependents or nominee will receive the insured
amount.
Investment:
A portion of the premium paid by policy
holder is invested in various funds. These funds may be risky and
return potential that is equity funds or investor also choose lower risk debt
funds for stable returns.
Flexibility:
ULIPs offer flexibility in terms of
premium payments, policy holders can switch their fund according to their
financial goals. Partial withdrawals also possible in ULIP.
Transparency:
ULIPs provide all the information about
the charges to the policyholder like fund management charges, mortality
charges, premium allocation charges etc., this information or transparency
helps investors to understand the cost associated with their investment.
Lock in Period:
The scheme has a lock in period,
investor or policyholder need to pay penalties for withdrawing their funds
before the defined period, such rules are encourages in long term investment.
Tax Benefits:
ULIP policy holder can claim tax
benefits under section 80C of the Income Tax Act. Additionally, the
maturity amount are also tax free under section 10(10D).
ULIPs are suitable for individuals
looking for a combination of insurance protection and investment growth.
However, it's essential to carefully evaluate the features, charges, and
investment options of ULIPs to ensure they align with one's financial goals and
risk tolerance.
Example:
Varun has decided to purchase a Unit
Link Insurance Plan, his aim is to protect family members as well as a sizable
return amount from his investment. He chooses the policy with an annual premium of policy is Rs.
20,000 for 15 year policy term period. The insurance company offer him
different type of funds for investment such as equity, debt, balance fund etc.,
The executive of the insurance company
explain him about the charges such as fund management charges, administrative
charges and other charges which was deducted from the premium.
Varun decides to allocate his
investment as follows:
60% in an equity fund
30% in a debt fund
10% in a balanced fund
The value of the Varun’s investment in
each fund depends upon the market fluctuation and performance. If
the market performs well, the value of equity fund may increase or if it
performs poor, the value may decrease.
At the end of the policy term, if Varun
survives, he will receive the maturity proceeds, which will be the accumulated
value of his investment in the chosen funds. This amount will be tax-free under
Section 10(10D) of the Income Tax Act.
In case of Varun's demise during the
policy term, his nominee will receive the higher of the sum assured or the fund
value.
