United Linked Insurance Plans (ULIPs) are popular investment instruments that are used as tax savings instruments as well as for insurance. Along with this this product enables you also to get returns by investing in schemes that invest in equities.
How do ULIPs work?
Let's understand how these products work in a very simple way. You begin by paying premiums each year. Let us say you pay a premium of Rs 1 lakh each year.
Apart from this there is a premium allocation charge for various costs involved, including mortality charges and fund management charges, which are the other charges that are involved in ULIPs.
So, from the Rs 1 lakh, the investment might actually end-up being just around Rs 94,000, because of the various allocations. From this amount you have the choice to invest in debt or equity or a combination of both.
When the markets are low, you can move money from debt to equity and vice versa. On the other hand, when the markets surge you can move money from debt to equity.
There maybe a charge for switching the funds, while some may have a number of charges that may not be applicable on account of a number of free switching charges.
When can you partially withdraw money from ULIPs?
Unit Linked Insurance Plans offer you tax benefits under Sec 80C of the Income Tax Act. These instruments like most other tax saving instruments have a lock-in period. While the PPF has a lock-in of 7 years and the ELSS has three years, Unit Linked Insurance Plans, come with a lock-in of 5 years.
What this means that there is no way you can withdraw the money before 5 years. That too partial withdrawal is arrived only after 5 years. The other norms for withdrawal of money from ULIPs are as follows:
1. You cannot withdraw money from Unit LinkeD Insurance Plans, if you have not paid your premiums on time.
2. The policy has to be in force to withdraw the premiums.
3. The holder has to be at least 18 years of age.
It is not advisable to withdraw money early, as the longer you hold, the greater are your chances of making better money, particularly, if you have opted for equity oriented funds.
Another important aspect to consider in Unit Linked Insurance Plans is the switching. If you feel that there is a prospect of equities rallying, you could switch from debt to equity and vice versa. It's important to note the switching charges could be applicable and it really depends on the insurance company.
ULIPs are unique because they offer you a combination of insurance as well as returns. A drawback with the scheme is that because of a host of charges, you may end up losing as much as 5 per cent, due to the various charges that are applicable. These instruments offer you tax benefits under Sec 80C of the Income Tax Act, which helps to boost your overall yield.