Unit Linked Insurance Plan (ULIP) is a unique financial product. It is a life insurance policy and investment rolled into one. Primarily a life insurance plan, ULIP allows you to invest in money market assets and earn valuable returns in the long run.
Many insurance companies also give you the flexibility to choose the premium payment mode. You can either select a one-time single premium policy and pay the premium at once or choose the regular premium payment mode. In the latter option, you can pay the premium in smaller amounts periodically; it can be every month, quarter, half-yearly, or annually.
Many prefer buying ULIP over other life insurance policies mainly because it offers maturity benefits. However, this does not mean all is well with ULIP. It also has its fair share of drawbacks.
If you are a first-time life insurance buyer and are thinking of buying ULIP, then knowing its pros and cons would help you make an informed purchase decision.
Since ULIP is an insurance policy, it ensures that your family’s financial future is secure. If something happens to you during the policy period, then the insurer will pay the death benefit to the nominee. Your family can use the amount to take care of their everyday expenses and continue living the same lifestyle even in your absence.
One of the most significant ULIP benefits is its taxability. It is one of the few financial instruments in India that enjoys EEE tax status. This means the premium you pay from the policy is eligible for tax deduction up to Rs. 1.5 lakh in a financial year. The returns you get from the investment are tax-free, and the death benefit your family receives is also tax-exempt.
A financial emergency can occur anytime. In such cases, you can partially withdraw funds from your ULIP policy and get access to immediate cash. Thus, ULIP gives you the chance to liquidate funds at any time you want. However, you can partially withdraw the funds only after the five-year lock-in period is over.
Read more about What is lock-in Period in ULIPs?
Unlike the traditional investment instruments like bank savings accounts or fixed deposits, ULIP provides you with market-linked returns, which are much higher. Although there is an element of risk involved with an investment in ULIP, historically, ULIPs have offered returns in the range of 10-12% or more over an investment period of 10-15 years.
Another significant benefit of ULIP is the fund switch option. Depending on how well the market is performing, you can switch your investments from one fund to another to maximise the returns potential. Also, this feature allows you to align your portfolio as per your changing financial goals and risk-taking capacity.
ULIP has a lock-in period of five years. This means you cannot withdraw funds from your corpus for five years. Even if you surrender the policy, you get the amount after five years. Many people consider this a major ULIP drawback.
Although you can exercise the fund switch option any time you want, the insurers have a limitation on the number of times you can use this feature in a year. If you exceed the free switch limit, then you would have to pay the fund switch fees/charges.
One of the major drawbacks of ULIP is the various costs associated with it. You may have to pay fees like premium allocation charges, mortality charges, fund management charges, etc. All these fees can eat a significant amount of returns you take home.
Although there are a few drawbacks of ULIP, its pros completely outweigh it. Thus, if you are looking to buy a ULIP policy, then do your research well, compare the different plans and choose the right policy that suits your needs. It should offer you sufficient insurance protection, and the premium must be affordable.
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