Advantages And Disadvantages of ULIPs In India

Unit-linked insurance plans, or ULIPs, are a type of insurance that provides the benefits of both life insurance coverage and investment. For a chosen policy term, policyholders must pay premiums either monthly, semi-annually, or annually. With a ULIP plan, policyholders can invest for a specific time and enjoy systematic returns over a period of time. ULIP is best suited for those looking for long-term investment goals. Want to know more about these plans? In the section below, let’s take you through the advantages and disadvantages of ULIPs. 

Features of ULIP Plans

Some of the features of ULIP plans are as follows:

• ULIP provides the benefit of both investment and insurance under one plan
• With your ULIP plan, you make switches between different funds like debt, equity, or balanced funds
• This plan lets you enjoy partial withdrawals in case of emergency
• Both the sum assured and investment can be chosen as per your needs
• You can also track the performance of the invested funds to see how it’s performing and accordingly make switches

Advantages And Disadvantages of Unit-linked Insurance Plans

As an investment alternative, ULIPs are becoming increasingly popular. It is one of a kind plan that combines the benefit of investment and insurance. However, there are several pros and cons of the Unit Linked Insurance Plans, some of which have been listed below:

Advantages Of ULIPs

Some of the reasons why you should buy ULIPs are as follows:

Long-Term Investment

ULIPs are an excellent choice for people looking to invest for a long term. This is because short-term market volatility produces lesser returns, but long-term market investments produce very attractive returns. They are perfect for people who want to put money down for a long-term goal, such as their child's school or marriage, or anything else. 

Tax-Free Returns

ULIPs provide tax-free returns as specified under section 80C of the Income Tax Act of 1961. Under section 80C, ULIP premiums are tax-deductible. Additionally, the death benefits received from ULIPs are also tax-free. The policyholder is also entitled to the guaranteed payout or the value of the fund's investments, whichever is greater, and these returns are not taxed.

Partial Withdrawals

Policyholders are also permitted partial withdrawals after the lock-in period, as long as they do not exceed 20% of the policy's fund value. Additionally, these withdrawals are tax-free. However, you need to remember that there is only a fixed number of withdrawals that you can do.

Good Returns

Depending on the fund in which one invests, ULIPs can provide good returns. If the fund is substantially engaged in capital markets, the fund will do well if the stock markets do well. Moreover, ULIPs include life insurance coverage as well as they act as a safety net if the policyholder passes away unexpectedly, as the nominees can claim the sum assured.

Flexibility

ULIPs give investors the ability to switch between investment funds as their goals and needs change. Policyholders can profit from the fluctuation in stock values by switching between equity, debt, and cash. If they are unfamiliar with how to actively manage their funds, they can choose monthly programmed switches, in which a fixed amount is switched at a specific date.

Disadvantages Of ULIPs

There are some disadvantages as well when you buy a ULIP policy such as the following:

Expensive And Complex

Because ULIPs mix insurance and investing, the premiums charged for life insurance end up being much higher than a few life insurance policies. They are also complicated in terms of fees, and sometimes there is a lack of transparency when it comes to the allotment of funds towards insurance and investment. 

Higher Beginning Costs

ULIPs are more expensive in the first few years due to charges levied on the investor that go toward policy charges. The cost is high because there are charges that go toward the management of your funds. 

Market Fluctuations

In the early years, investors can expect lesser profits due to market changes. So, if you're wanting to invest for the short term, ULIPs aren't the best option. The returns on ULIP plans will be significant only after you have invested for some time. 

Switches Are Chargeable

Most insurers give free switches up to a specified number, beyond which switches are charged for each transaction. Thus, if you think that you can enjoy an unlimited number of switches with your ULIP plan, then you are mistaken. 

Lock-In Term

There is a five-year lock-in period for ULIPs, during which no withdrawals are permitted. This means that during the initial 5 years, you cannot enjoy flexibility with your ULIP plan.

Conclusion

ULIPs come with several benefits and drawbacks. ULIPs are a wonderful alternative for those who wish to invest in instruments that provide a variety of benefits in one plan, such as good returns, tax savings, and life insurance. However, you still need to be aware of the limitations of ULIPs and should consult a financial advisor before actually buying it. You can also contact us at InsuranceDekho to get assistance in buying the right ULIP.

FAQs

• Who should buy ULIPs?

ULIP is recommended for those who have a high-risk appetite and want to get the benefit of both insurance and investment under one plan.

• Can I get tax benefits on ULIP plans?

Yes, the ULIP plan comes with tax benefits as specified under section 80C of the Income Tax Act of 1961.

• Can I get unlimited free switches with a ULIP plan?

No, unlimited free switches are not available with ULIP plans.