A good insurance policy is the need of the present. However, most people do not invest in insurance because of its stand-alone nature of only offering protection. But with investment options like ULIPs or Unit Linked Insurance Plans, you have an option to enjoy the benefits of both an insurance policy and market-linked investments. Typically, ULIP plans can be classified as per the ULIP funds you choose to invest in or according to wealth creation capacity.
Here is all you need to know about the different types of funds available in ULIPs:
ULIPs as per the type of funds
Typically, ULIP returns are dependent on the investment in different ULIP funds, such as:
- Equity funds: Equity funds involve investment in equity shares of different companies with a general aim for capital appreciation. You can choose to invest in large-, mid- or small-cap funds. Equity investments are considered the riskiest of all, and therefore, offer high returns. These funds are best suited for you if you have a high-risk appetite.
- Debt and income funds: These involve investments in fixed income instruments, government securities, corporate bonds and other secure financial instruments. These types of funds carry low to medium risk and offer moderate but secure returns. They are ideal for low-risk takers.
- Cash funds: Also known as liquid or money market funds, these funds involve investment in highly liquid, low-risk and short-term market securities such as call money, cash deposits, market funds, treasury bills, commercial paper, certificates of deposit (CD), etc. These funds come with strong credit ratings and are ideal for you if you have a short investment horizon and low-risk tolerance. However, the returns in such funds are also low.
- Balanced funds: Some ULIP investments allow you to invest in both equity and debt instruments, as per your preference. By opting to invest across both types of securities, you successfully distribute the risk across high-risk and low-risk investments. Balanced funds are much more stable than equity funds, but their returns are lower than equity funds.
ULIPs as per capacity to create wealth
ULIPs can also be categorised as per their capacity to create wealth in the long term. Some ULIPs that focus on wealth creation are:
- Single premium/regular premium ULIPs: Single premium ULIP plans allow you to pay all your premiums at once at the time of ULIP purchase. Regular premium ULIPs allow you to pay your premiums periodically across the policy tenure. You can choose to pay premiums monthly, quarterly, semi-annually or annually.
- Guarantee/non-guarantee ULIPs: Guaranteed ULIP policy limits the market exposure of your portfolio to preserve your capital. Guaranteed ULIPs offer stable returns over a long period. Non-guaranteed ULIPs aim to maximise wealth by allowing you to invest largely in equity markets. Non-guaranteed ULIPs offer high returns but also high risk.
- Life stage/non-life stage ULIPs: Life stage ULIP plans function based on the assumption that as your age increases, your risk tolerance reduces. Therefore, as your risk tolerance lowers with time, the plan invests more of your premiums in debt instruments rather than equity. A large portion of your funds is invested in equity when you are younger. The main objective is to progressively focus on stable returns and capital preservation as your age increases. Non-life stage ULIPs do not function on any assumption and invest your funds as per your preference from time to time.
Switching and redirection in ULIP policy
The best ULIPs allow you to change your ULIP fund allocation by switching between your funds. You can use this to manage the volatile market. For instance, if you are heavily invested in equity funds, but the market is highly volatile, you can always switch your funds and invest more in debt to reduce your equity exposure. Switching primarily involves shifting your corpus from one fund to another. However, redirection implies that you change the investment course of your future premiums towards the different fund options available.
All ULIPs allow switching between funds. Best ULIP funds allow free switching of funds without any upper limit. However, some companies levy ULIP charges for fund switches after a specific limit.
Irrespective of the type of ULIP, all ULIPs offer some strong benefits
Some of the top benefits of investing in a ULIP are:
- ULIPs offer the dual advantage of a secure life insurance cover along with capital market investments.
- ULIPs are ideal for financially securing the future of your family in your absence.
- ULIP investments offer market-based returns as per your risk profile, enabling you to achieve your financial objectives.
- ULIP premiums are eligible for tax exemption under Section 80(C) of the Income Tax Act, 1961. Moreover, death benefit and maturity proceeds from the ULIP policy are also exempt from tax under Section 10(10D), subject to specific conditions.
- ULIP investment offer compounded returns. This allows you to generate a high return and accumulate a larger corpus in the long run.
- ULIPs allow you to switch between different funds – equity and debt.
Wealth Plus from Edelweiss Tokio Life Insurance
The Edelweiss Tokio Life Wealth Plus plan gives you the dual benefit of a life cover and an opportunity to grow your savings.
Some of the top features and benefits of this Edelweiss Tokio ULIP include:
- Additional allocations to your policy at 1% of your annual premium for the first five years and 2% every five years.
- Additional payout to your child along with a waiver of premiums in case of your unfortunate demise during the policy tenure. The policy remains active.
- An option to manage your ULIP portfolio on your own with unlimited fund switches or opt for Edelweiss ULIP expert management.
- Permission to take partial withdrawals from your ULIP fund value from the 6th year onwards.
- Flexibility to invest any extra funds in the ULIP plan over the policy term.
- Eligible for all ULIP tax benefits as offered under Income Tax Act, 1961
With their many benefits and strong ULIP returns, ULIPs have become an integral part of a sound financial plan. Do an in-depth ULIP analysis and choose your funds wisely to easily create a ULIP portfolio that best matches your needs, financial objective and risk tolerance. Make an intelligent decision for your secure future!
Chirag Iyer – BFSI Enthusiast
Chirag is a writer and an avid reader who loves to drink coffee! His other interests include boxing, karate, and singing.