ULIPs: How Do They Even Work?

When it comes to choosing an investment option, you might not want to be in over your head. Instead, you would wish to have a plan which offers you a sort of comprehensive package and set of benefits.

United Linked Insurance Plans (ULIPs) serve this very purpose and fulfill your insurance as well as investment needs. Here, we will look at how ULIP works, but before we get into the details of it, let us understand what this plan means.

What are ULIPs?

United Linked Insurance Plans (ULIPs) have turned out to be a popular investment option as they offer the dual benefits of investment and insurance. With an active ULIP, you can be assured that your investment is generating generous returns over time while providing you life cover at the same time.

ULIPs are a great option for planning retirement and achieving the numerous financial goals that we tend to have in our lives, such as the education of children, weddings, et cetera.

Considering the intricacies of ULIPs, it is essential that you know the ins and outs of it so that you can make a better and more informed decision.

How do ULIPs work?

When you invest in a ULIP, one part of your premium is invested in providing insurance cover, while the other part is invested in several market-linked instruments, such as stocks and bonds. While the first part of the investment makes sure that your life is covered, the second part makes sure that you receive generous returns upon surviving the policy.

It is essential to understand the role of fund managers to know how ULIP works. ULIPs are managed by fund managers who are experts in dealing with investment portfolios. They make sure that your money is spent in the right place at the right time so that the risks associated with the investment turn out to be minimal. Besides, you also have the option to switch your portfolio between the various funds — this should be solely based on the amount of risk that you are willing to take with your investment.

The flexibility of switching between the various financial instruments and the human touch in the form of fund managers makes sure that your investments perform well over time. Such flexibility is one one the primary reasons why ULIPs have gained immense popularity in the market.

ULIP lock-in period

One of the factors that come into play while opting for an insurance plan is the kind of liquidity the plan has to offer. ULIPs earlier had a lock-in period of 3 years. However, changes introduced by the Insurance Regulatory and Development Authority of India (IRDAI) increased the lock-in period of ULIPs from three years to five years. One of the primary reasons why this change took place was to motivate the investors to invest for a longer period so that they could make the most out of their investments, which, after all, is the ultimate goal of any sort of investment plan.

Income tax benefits of ULIPs

Another reason why ULIPs have garnered much popularity over time is the fact that they offer an excellent tax-saving opportunity to the investors. With ULIPs, you get to save as much as Rs 1.5 lakh every financial year under Section 80C of the Income Tax Act. Furthermore, the amount that you receive at the time of maturity is also liable for exemption under Section 10(10D) of the Income Tax Act.

For those who are looking to save more tax, ULIPs should be their go-to investment option due to their attractive tax-saving options.

Before you invest in a plan, it is essential to know how they work. Now that you understand how ULIP works, it is time to choose a great ULIP. With so many options int he market, it is essential to choose a plan which offers you a host of benefit at no extra undocumented charges, With great online support and ease of access, a good ULIP could very well be your go-to option when it comes to choosing ULIPs.