Shedding Light On The Pros And Cons Of ULIPs

Whether you're in your 20s, 30s, or 50s, you'll almost certainly have life goals, financial aspirations, and dreams that you want to achieve. When you're in your twenties, you might want to put money aside to buy a car or the house of your dreams. You're probably focused on providing for your children's education when you're in your 30s. You are likely to save money for your children's education while also developing your retirement fund in your 50s.

Whatever your financial goal, you'll need money to achieve it. A ULIP (Unit Linked Insurance Plan) can help in this situation. It aids in the attainment of your financial objectives while also providing life insurance. A ULIP is a life insurance policy that also serves as an investment instrument. It's one of the most popular insurance products because it combines insurance and life insurance.

Pros Of Buying ULIPs

The following are some of the advantages of purchasing a ULIP:

• Liquidity

A five-year lock-in period is standard for ULIPs. Liquidity refers to the ease with which an investment can be cashed without negatively affecting its returns. After the lock-in term expires, policyholders can withdraw part or all of their investments from ULIPs.

• Transparency

ULIPs are one of the most transparent types of investment. The fund management fee, policy administration fee, mortality charge, and other charges and fees are all specified in the policy document. Furthermore, the policyholder is fully aware of the money allocation.

There are no hidden fees or charges with ULIPs.

• Flexibility

ULIPs give policyholders a great deal of freedom. You can change your fund allocations as your financial goals, risk appetite, and other factors change.

• Tax Benefits

Section 80C and Section 10(10D) of the Internal Revenue Code both apply to ULIPs. As a result, you can deduct both your premium payments and your returns from your taxes.

• Mitigation Of Risk

Professional fund managers handle your funds, reducing the dangers of stock market investing. As a result, ULIPs are an excellent option for investors who wish to benefit from the stock market's profits but don't want to invest in them separately.

Cons Of Buying ULIPs

The following are some of the disadvantages of purchasing a ULIP:

• Additional Charges

There may be other expenses in addition to mortality. These fees will deplete your profits once more.

For example, all top-up premiums paid are subject to a 2% one-time premium allocation charge. This equates to 2% of your premium is paid in advance. You don't have to be so ruthless with your cash.

• Your Top-Up Premium Isn't An Investment In The Traditional Sense

And many of us are under the sense that something isn't as it seems.

Top-up premiums must be thought of as a single premium ULIP purchase. The IRDA Unit Linked Insurance Product Regulations, 2013, state that this is the case.

As a result, you'll need to buy an additional Sum Assured, which means you'll need to buy more life insurance. If you're under 45 years old, your minimum Sum Assured is 125 percent of the single premium (top-up premium), and if you're 45 years old or older, your minimum Sum Assured is 110 percent of the top-up premium. In a previous post, we explored how buying life insurance comes with a price tag in the form of additional mortality charges.

• Extra Fees And Commissions

When we compare the costs of ULIPs to the costs of other insurance and investment plans, we find that they are too high. They charge about 40% in commission on ULIPs, which is excessive. However, if we consider the commission rate for the other plans, they will only earn 2-5 percent from commissions. As a result, we may conclude that, as compared to other plans, ULIPs are extremely costly.

• Complexity

In comparison to mutual funds and other investment options, ULIPs are more complicated. Many charges are involved in ULIP funds, and these charges are deducted from the premium amount. Mutual Funds, on the other hand, do not charge a lot of fees because they only allow for stock market investments, not risk management strategies.

Conclusion

A ULIP is a financial product that combines insurance and investment. A portion of the premium is used to provide insurance coverage to the policyholder, while the rest is invested in debt and equity securities. The use of money (for debit and equity investment) from the pool of premiums is similar to that of mutual funds in this scenario. The parallels don't stop there. A ULIP, like mutual funds, has several units assigned to it, and the idea of Net Asset Value (NAV) applies here as well. 

Also read: 

 What Is Premium Redirection In ULIPs?

Avantages and Limitations Of ULIPs

Disclaimer: This article is issued in the general public interest and meant for general information purposes only. Readers are advised not to rely on the contents of the article as conclusive in nature and should research further or consult an expert in this regard.