Know how Your ULIP Premium Gets Utilized

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In a world full of uncertainties, it is crucial to have a financial plan that secures your future. There are different investment avenues that one can choose depending on their goals to achieve the desired level of financial security. While you work towards that financial security and freedom, it is also of paramount importance to have a backup plan in case something unfortunate happens to you while you are still away from that goal. A life insurance plan acts as that plan-B which ensures that the future of your loved ones is not compromised even if something unfortunate happens to you. The importance of insurance is even more so in a world where we are coping with the deadly Coronavirus which has killed over one million people across the world.

But what if there was a way to achieve both these objectives by following a single path -- where working on your plan-A automatically creates your contingency plan-B? This is where a Unit-Linked Insurance Plan, or simply called ULIP, comes in. But what is ULIP? A ULIP is a hybrid investment product that combines both investment and insurance needs of the investor. It is an efficient and long-term financial planning instrument. And on top of that, it also provides tax-benefits under different provisions of Income Tax Act, as amended from time to time.

Dual Benefits of ULIP

You can invest in a ULIP to secure your retirement years, for your children’s higher education and marriage, or to meet any other financial need expected to occur in the future. The insurance part in the ULIP provides life cover with death benefit. In case of the unfortunate demise of the policyholder during the policy term, the nominee will be paid the death benefit amount. In addition, if the policyholder survives the term of the ULIP, she/he can cash in for its maturity value.

While investing, you can opt for an equity or debt fund exposure, or exposure to both. You have to specify the percentage of your corpus to be allocated to each of the funds you opt for. This constitutes the investment component of the ULIP. Depending on your risk profile, age and financial goals, you can decide your investment portfolio.

For example, young investors may allocate a higher proportion to equity and a smaller proportion to debt fund. On the other hand, senior citizens can opt for a higher proportion of the corpus to debt fund. Investing in ULIPs helps you imbibe the habit of regular saving as the specified amount needs to be invested at regular intervals. They offer a fund switch option - the option to move money between equity, and debt funds.

Premium allocation

When you invest in a ULIP plan, the premium invested offers the policy holder dual benefits of investing either in equity fund or debt fund (or both), while ensuring a life insurance coverage as well so that your loved ones are protected.

The total corpus you invest is divided into ‘units’ with a specific face value. Each investor is allocated ‘units’ in proportion to the amount invested. The value of each unit is known as the net asset value (NAV). The NAV tracks the performance of the fund. It reflects any increase or decrease in the value of the underlying assets. In case you withdraw some part of the corpus in the investment, in the middle of the tenure of the policy, a corresponding number of units will be sold for payment of the partial withdrawal proceeds. After maturity, payment may also be spread over a specific number of instalments if you choose such an option and if the same is available under the product.

In case of the demise of the investor within the policy tenure, the death benefit will be payable to the nominee.

Efficient long-term instrument

ULIPs are suitable for investors who need a long-term insurance plan that offers the combined benefit of market linked returns as well as life insurance in a single policy. Equity helps generate high-growth potential returns over the long term, based on the market conditions. The debt component offers stronger protection to your corpus against market fluctuations. You may choose a ULIP investment according to your goals and risk appetite. ULIPs offer you the option for a partial withdrawal after a certain period. Also, there may be a top-up option, enabling you to invest more money in your plan.

Tax benefits

ULIPs also offer you a tax benefit. Investments in ULIPs are eligible for deduction against taxable income under Section 80C of the Income Tax Act 1961, subject to provisions stated therein. You can deduct a total amount of Rs 1.50 lakh per annum under this Section. The maturity proceeds of a ULIP are also exempt from tax under Section 10(10D) of the Income Tax Act, subject to provisions stated therein. In case of demise of a ULIP investor during the term of the plan, the death benefit paid to the nominee is exempt from tax under Section 10(10D) of the Income Tax Act, 1961.

Charges levied on investor

While investing in a ULIP, you should also be aware of the charges involved. Some of these include:

Premium allocation charge: This is a percentage of the premium you pay. Hence, premium allocation charge is deducted and the remaining amount is invested.

Fund management charge: This charge is levied as a percentage of the value of assets and will be appropriated by adjusting the NAV of the fund. The rate levied will be equal to the annual rate divided by 365 and multiplied by the number of days that have elapsed since the previous unit valuation.

Policy administration charge: This charge is levied as a charge for servicing your policy.

Mortality charges: It is levied for providing risk cover during the policy term

Switch charge: This is a charge for switching from one option to another, over and above the number of free switches allowed.

Partial withdrawal charge: It is levied in case a partial withdrawal is made during the policy tenure.

Different funds levy all or most of these charges. You need to understand the terms and conditions of the ULIP and the various charges levied while investing. These charges are significant as they have an impact on the total returns from the policy that you invest in. If you are confused about how much premium you would require to create a corpus big enough to achieve your financial goals, you can use the ULIP calculator from Bajaj Allianz Life Insurance to get an idea before deciding on a plan.

Bajaj Allianz Life Goal Assure# A Unit-linked Non-Participating Life Insurance Plan, a ULIP plan by Bajaj Allianz Life Insurance offer return of the entire mortality charges or life cover charges$ deducted during the policy term at the time of maturity You can also opt for maturity benefits in instalments^ .
This plan offers a choice between eight different funds and four investment portfolio strategies. Hence, these features combined may result in optimum or desirable returns on investment for the policyholder over the investment period provided they stay invested.

Because of the multi-dimensional benefits that ULIPs offer, you must consider adding them to your investment portfolio to strike a balance between your insurance and investment needs. It could serve as a one-stop solution for your family’s financial security and your long-term financial goals with the added tax benefits on investment as well as maturity serving as a cherry on the top.

[1] https://en.wikipedia.org/wiki/Template:COVID-19_pandemic_data
# Bajaj Allianz Life Insurance Company Limited and Bajaj Allianz Life Goal Assure are the names of the company and the product respectively and do not in any way indicate the quality of the product and its future prospects or returns. Unlike traditional products, Bajaj Allianz Life Goal Assure is a Unit Linked Insurance Plan (ULIP). Investment in ULIPs is subject to risks associated with the capital markets. The policy holder is solely responsible for his/her decisions while investing in ULIPs. For more details on risk factors, terms and conditions please read sales brochure & policy document (available on www.bajajallianzlife.com) carefully before concluding a sale
$Return of life cover charges = return of mortality charges (ROMC) which is payable on maturity, provided all due premiums have been paid.
^Settlement Option is subject to policy terms and conditions

This article is part of a featured content programme.
Published 06 November 2020, 10:37 IST

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