ULIP is a hybrid investment product, which strives to meet both investment and insurance needs. The policy premium is invested in different funds at the choice of the policyholder, which can be spread over several asset classes. This preferred long-term financial planning product also comes with substantial tax benefits under Sections 80C and 80 CCD of the Income Tax Act. Under Article 80 of the CCD, the maturity product or sum insured for policies up to Rs 2.5 lakh premium is tax exempt. Another advantage of investing in a ULIP is that intra-fund trading is tax exempt unlike some other financial instruments which are subject to capital gains tax.
Before investing in a ULIP, you should keep the following in mind:
Opt for an optimal sum insured
The sum insured is the lump sum promised to the nominee of the insured in the event of the latter’s death during the term of the ULIP; it is declared at the time of purchase. It is advisable to opt for a sufficient sum insured because this sum would be used to meet the needs of the family in the event of the death of the insured. ULIP products with reimbursement of mortality costs should be preferred, as they offer the benefit of reimbursement of the mortality premium in the event of the unfortunate death of the insured.
Additional costs involved
Some of the ongoing charges associated with ULIPs are policy administration fees, premium allocation fees, fund management fees, top-up fees, mortality fees, switch fees, endorsement fees, premium interruption costs, etc. Not all insurers levy all of these charges while some even make the amount charged under the heads. Before contacting an insurer, make sure you have a clear idea of the different types of charges levied. A policyholder should understand the total amount of fees and the impact it could have on potential returns, before purchasing the ULIP policy plan. New age ULIPs have considerably lower fees.
Insurer’s credibility and solvency
ULIPs are long term investments and therefore it is imperative to verify the credibility and pedigree of the insurance provider before making a purchasing decision. Insurance companies are highly regulated and the regulator ensures that all companies comply with solvency guidelines. The solvency ratio measures a company’s ability to meet its long-term debt obligations and is a good indicator of the financial stability of the insurer.
Rebalance the asset allocation according to your risk profile and your objectives
The asset allocation for the ULIP policy should be chosen based on the risk profile of the policyholder. Low-risk policyholders can place their investments in debt funds, while aggressive investors can opt for stocks. You can also choose a balanced approach by investing in a fund that offers a hybrid option (i.e. a mix of stocks and debt).
Compare and choose products wisely
Before purchasing a ULIP plan, be sure to compare features and analyze all available products. Analyze the underlying funds of the products, including the fund’s objectives and past performance. But keep in mind that past performance is no guarantee of future performance of the funds.
The ULIP plans available in the market can be a great option to meet your insurance and investment needs, and can help you achieve your goals. These plans also offer opportunities for tax savings, a choice of multiple investment portfolio strategies, and varied asset allocation with switching options. But before investing in a ULIP, make sure you know all the variables involved to make an informed decision.
(The author is Head-Equity & Executive Vice President, Investments, Bajaj Allianz Life. The opinions expressed are personal.)