ULIPs have been gaining popularity in India as an investment option that combines insurance and investment. According to a report by the Insurance Regulatory and Development Authority of India (IRDAI), the total premium collection for ULIPs in 2020-21 stood at Rs 78,698.50 crores. This represents a 36.92% growth over the previous year, indicating a growing interest in ULIPs among Indian investors. However, despite their popularity, there are still many questions surrounding ULIPs. Are they worth the investment? What are the benefits and drawbacks of investing in ULIPs?
Let us explore these questions in detail and help you make an informed decision about investing in ULIPs:
Now, let’s take a look at the benefits of ULIPs:
1. Tax Benefits:
ULIPs offer tax benefits under Section 80C of the Income Tax Act. The premium paid towards a ULIP is eligible for deduction from the taxable income up to a maximum of Rs.1.5 lakhs. Additionally, the maturity amount or death benefit received from a ULIP is tax-free under Section 10(10D) of the Income Tax Act.
ULIPs offer flexibility in terms of investment options. Policyholders can choose the type of fund they want to invest in based on their risk appetite and financial goals. They can switch between funds or switch the allocation of their investments between equity and debt based on market conditions and their financial goals.
3. Life Insurance:
ULIPs offer both investment and life insurance, which makes them a good option for individuals who want to secure their financial future while also ensuring their loved ones are financially protected in case of their untimely demise.
4. Long-term Investment:
ULIPs are a good option for long-term investment goals. The lock-in period for a ULIP is five years, which ensures that policyholders stay invested for the long term. This helps in building a significant corpus over time.
ULIPs offer transparency in terms of charges and fees. All charges such as fund management charges, policy administration charges, and mortality charges are disclosed upfront, ensuring that policyholders are aware of the fees they are paying and the impact it has on their returns.
Now, let’s take a look at the other side of the coin and consider the cons of ULIPs:
While ULIPs offer transparency in terms of charges, they do have high charges compared to mutual funds. The charges can eat into the returns on investment, which can be a concern for investors.
2. Lock-in Period:
The lock-in period of five years for ULIPs can be a deterrent for investors who want to stay invested for a shorter duration.
Returns: The returns on ULIPs are not guaranteed and are subject to market risks. The returns on investment depend on the performance of the underlying fund, which can be volatile.
ULIPs can be complex to understand for novice investors. Understanding the different charges and fees can be a challenge, which can lead to confusion and misinformation.
4. Market volatility:
As with any investment, ULIPs are subject to market risks and volatility. The value of the investment can fluctuate based on market conditions, and there is no guarantee of returns. Investors need to be aware of the risks involved and have a long-term investment horizon.
5. Opportunity Cost:
ULIPs require a long-term investment horizon due to the lock-in period. Investors need to evaluate the opportunity cost of investing in a ULIP versus other investment options such as mutual funds or stocks, which offer more flexibility in terms of liquidity and investment horizon.
ULIPs offer a combination of investment and life insurance, which can be a good option for long-term investment goals. They also offer tax benefits and flexibility in terms of investment options. However, they do come with high charges and a lock-in period, which can be a concern for some investors. It is important to evaluate your financial goals and risk appetite before investing in ULIPs. It is always advisable to consult with a financial planner before making any investment decisions.
These tips are brought to you by expert Financial Planners at HappyWise Financial Services.