It can often be intimidating to invest in a financial instrument without fully knowing what you are signing up for. In fact, a 2018 study by PwC1 made recommendations on the level of information/disclosure given by the policy providers to the unassuming customers. It states that in order for a unit-linked product to continue to be successful, insurers must ensure easy access to the relevant information for the potential policyholders so that they can make informed investment decisions and comparisons between two products.
In the light of this acknowledgement of the need for information and knowledge, here are all your burning questions about ULIPs answered:
1.What is a Unit Linked Insurance Plan?
A Unit Linked Insurance Plan (ULIP) is a market-linked investment instrument that offers a combination of investment and life insurance cover. Along with this dual benefit, you can exercise reasonable flexibility and choice with regards to the funds where you want to invest your premiums.
2.What Types of Funds do ULIPs offer for investment?
ULIP funds offer you the choice of funds across a spectrum in terms of risk. You can choose to invest in equity funds, at the higher risk end, if you aim for capital appreciation; into Bonds and other fixed interest instruments, with relatively less risk; into cash funds or money-market instruments for high liquidity and lowest risk, or you can choose to have balanced funds which entail components of all these, making it a medium risk hybrid instrument. In the end, it largely depends on your risk profile and investment objective.
3.What is the maturity benefit of a ULIP? Can I see how my funds are performing?
The benefits you receive on the completion of the policy term of Future Generali ULIPs are known as Maturity Benefits. These are equivalent to the fund value (the market value of the investment). If you want to know the value of your fund during your investment, Future Generali offers you the option to log in securely into the customer portal and view the fund value under the policy.
4.How are ULIP funds different from Mutual Funds?
The first major difference is that ULIPs serve the dual purpose of insurance and investment, whereas Mutual Funds are purely investment instruments. ULIPs also come with a lock-in period of 5 years, whereas you can withdraw mutual funds at any time. On the other hand, though, ULIPs provide tax exemption benefit even upon switching between funds. Mutual funds are subject to the recently introduced Long-Term Capital Gains Tax2.
5.What all charges and fees are to be paid under a ULIP policy?
- Administration Charges: These charges are deducted by Future Generali every month for the administration of your policy at the rate of 0.1% of the Annualized Premium.
The company deducts them from the unit account at the beginning of each month by cancelling out the units in proportion.
- Fund Management Charges: Fund management charges are deducted as a percentage of the fund's value before the fund reaches its net asset value. These are basically the fees you pay to the fund manager for their expertise.
- Switch Charges: Upon switching between equity and debt funds, for more than 12 times in a policy year, each switch would incur a charge of Rs. 100 each.
- Mortality Charges: These charges are levied depending upon your age and the amount of cover.
6.What is NAV in a ULIP policy?
NAV is the value of each unit of the fund on a given day. The NAV of each fund is displayed on the website of the respective insurers. You are given access to the NAV so you can keep track of your ULIP funds’ performance
7.What is the lock-in period for ULIPs?
Lock-in period is the period in which you cannot make any withdrawals or liquidate the accumulated fund value. If you opt to discontinue the policy before the 5-year lock-in period, surrender charges are deducted.
8.What tax benefits are offered under a ULIP policy?
Premium paid on ULIPs is eligible for a deduction under Section 80C up to a maximum of Rs 1,50,000 against your taxable income. Further, the amount you receive on maturity is tax exempt under Section 10(10D).
9.Can we do a partial withdrawal from the ULIP amount?
ULIP plans from Future Generali offer you the benefit of partial withdrawals, only after the completion of the lock-in period - five years from the inception of the policy.
10.Are Investment Returns Guaranteed in a ULIP?
The fund options under the ULIP plans are subject to changes and risks of the capital market. Thus if you want guaranteed returns, you should invest in debt and fixed interest bonds rather than their volatile counterpart, equity.
Knowledge of what you are signing up for makes it an easier decision when it comes to choosing the funds for your ULIPs.