What are the Pros and Cons of ULIPs?


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Like her parents, Sudha had assumed that when the time came, she too would invest separately in insurance and investment policies. She had plans to invest in a fixed deposit at the earliest so she would have enough funds to meet her future goals for higher studies. However, when she began working, her employment brought her in contact with an insurance agent who suggested Unit Linked Insurance Plans (ULIPs) as the ideal tool to meet her twin objectives of investment and insurance. She was intrigued but decided to study ULIP pros and cons before going ahead with the policy suggested to her.


ULIPs is an important investment instrument, that is gaining increased traction owing to their ability to successfully provide both protection as well as handsome returns. The premiums invested into ULIPs are separated into an amount that goes toward ensuring the policyholder's insurance coverage, while the rest is invested into market instruments of their choosing. ULIPs can serve as effective tools for meeting both short and long-term goals.

While studying the ULIP pros and cons, it is important to remember individual requirements and pick a plan according to those. Read on below to learn of ULIP pros and cons.

Pros:

  1. High Returns: ULIPs provide high returns since they invest in market instruments such as equity stocks or debt instruments. As a result, the amount invested into ULIPs generally generate high returns for investors.

 Death Benefit: In terms of coverage, ULIPs act as a life insurance policy for policyholders. As a result, if the policyholder dies, the ULIP provides a monetary death benefit to the nominees.

Flexibility of Investment: ULIPs provide investors with freedom to switch between funds, depending on market conditions. Thus, investors are able to outdo market performance and generate higher returns.

Tax Benefits: A major factor that needs to be considered while deliberating on ULIP pros and cons are the tax benefits they offer. Under Section 80C of the Income Tax Act, 1961, ULIPs provide tax exemptions to policyholders. Even the lumpsum amount paid out to nominees post-death of the policyholder is exempt from taxes.

Partial Withdrawals: One of the best features of ULIPs is the ability to make partial withdrawals. Once ULIPs are past their lock-in period, funds can be partially withdrawn which allows policyholders a certain amount of liquidity in meeting their short-term goals.

Cons:

  1. Complex and Expensive: The premiums paid on availing insurance with ULIPs is much higher than the premiums paid for term insurance plans. Additionally, it is not explicitly declared as to how much of the premiums invested will go towards ensuring protection and how much of it works as an investment. It is best to clear these details with an insurer, before the tenure of the investment has begun.

Higher Costs during Initial Phase: ULIPs are more expensive in their initial phases, and cost more because of the charges levied on the investor. These charges are mainly higher owing to increased payment towards ensuring coverage of the policyholder.

Lock-in Period: With ULIPs, investors must agree to a lock-in period, such as for 5 years. During this time, there is no partial withdrawals allowed from the fund.

Fluctuating Market Conditions: It is not possible for investment instruments to generate high returns all the time, especially if they are dependent on market conditions like ULIPs are. As a result, sometimes, fluctuations in market conditions result in low returns with ULIPs. However, since these instruments have a lock-in period of 5 years, returns are generally balanced out in that time period before investors have access to them.

Switches Could be Chargeable: While insurers could provide free switching between funds for a certain number of times, they could start costing beyond a certain limit. It is important to clarify the number of free switches allowed with the ULIP being opted for, while discussing ULIP pros and cons with investor agencies.

ULIPs do have certain disadvantages, but for the most part, the pros far outweigh the cons. The above mentioned factors are definitely driving the popularity of ULIPs as a new-age investment instrument of choice. Since they offer increased flexibility and transparency as compared to other kinds of investment instruments, ULIPs are being increasingly sought after.

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