A unit Linked Insurance Plan (ULIP) is nothing but an investment product that offers you the benefit of investment in the capital markets along with insurance.
Take a look at some of the advantages and disadvantages of an ULIP
Advantages of an ULIP
1. We invest so that we get good returns. Here ULIP provides us with good returns, since it invests in stock markets. If the market does well and we have invested in those stocks, we make a profit.
2. It provides mortality insurance cover. So, if the policy holder dies, the nominee can claim the amount
3. ULIP investment provides flexibility, wherein the policy holder can shift from one policy to another depending on how the market functions. Helping one gain huge returns on their investments.
4. If you are looking for a long term investment, then ULIP is best suited for you, as share market is never for someone who wishes to play for the short term.
5. Do we like to pay tax on our high earned money or on our investments? Whats the use of investments if everything is gone paying tax. Good news is that ULIP under section 80c, provides tax exemption to the policy holders. Even the money the nominee gets after the death of the policy holder is tax free.
6. What if you could withdraw your money and are not charged? Yes, ULIP offers this facility whereby you can withdraw your money after a lock in period of 5 years and they are tax free again.
Disadvantages of an ULIP
One of the biggest disadvantages of an ULIP is that the returns cannot be guaranteed. For example, if you have chosen an ULIP that invests bulk of the money in equities and the shares are not doing well, chances of losing money cannot be ruled out. This is one of the biggest risk and perhaps the only disadvantage that one can see from an ULIP.
One of the other disadvantages of the ULIP is that returns are very poor. This is because there are a host of charges that are associated with the sceheme, including administrative charges, mortality charges etc. This brings down your returns substantially. In the first year, almost 5 per cent of your money is lost paying these charges.
Other features of an ULIP
In an ULIP one can make partial withdrawals. This means if you have invested a sum of Rs 10,000, it is possible to withdraw Rs 5000 from the same. Also, in case you are not satisfied with the policy you can ask for a withdrawal within 15 days from receipt of the policy. Another feature of the ULIP is that you can switch from one fund to another. However, the feature should be available for a successful switchover.
Should you invest in a ULIP?
ULIPs offer you a combination of insurance and returns. If you have invested in an ULIP that parks a substantial money in equities, there is an element of risk in the product. Of course, if capital markets do well your fund could generate a superior return as well.
Having said that we believe that there are way to many charges on the ULIPs which make them an unattractive proposition.
So, if you want to really move away from the disadvantages of the ULIP, we suggest that you go in for a term insurance and a large cap equity mutual fund scheme.
So, it will offer you the same benefits of an ULIP, that is exposure to equities as well as insurance coverage. In fact, the term insurance coverage could be higher depending on your age. We suggest that you in for a term policy of at least Rs 1 crores.