By Priya Agarwal
The moment you hear about the Unit Linked Insurance Plan, there are some things you'll always hear:
- They are very expensive, so it's better not to venture availing one.
- It's just another investment option.
- The ROI is less than what you put in, so stay away.
- ULIPs are a much better option than traditional policies
So, how do you separate the facts from fiction? Here are some of the commonly asked questions, and not so commonly asked questions as well. It is time we cleared the air around Unit Linked Plan.
- Can you tell me about the Unit Linked Insurance policy? Is it useful?
A Unit Linked Insurance Plan is a combination of a life insurance policy as well as an investment. Here, the latter is more prominent. This is why; the returns of your Unit Linked are clearly defined. However, these are subject to market risks.
The premiums paid are slightly higher as compared to a traditional insurance plan, however so are the returns.
- What do I stand to gain or lose if I avail a ULIP?
There are a number of advantages to availing a Unit Linked Insurance Plan:
- There is transparency in the way your money is used up. You will be provided with the corresponding break-ups i.e. your investment returns, bonuses as well as risk cover.
- The flexibility in investments helps you to gain control over your money. You get to choose whether the type of investment is high, medium or low risk.
- You also have a liquidating option, i.e. after 5 years you may withdraw a majority of your savings leaving behind strictly what is necessary.
- While availing one, you get multiple benefits, these include: risk cover, investment benefits, as well as tax saving benefit under Section 80D.
- It is ideal for those people who do not want to directly participate in trading in the stock markets. Here, the risk involved is less.
- How different is ULIP from traditional policies? Before ULIPs, people generally bought traditional policies and used it as one of their investment options. Similarly, a unit linked insurance is also a combination of life insurance and investment.
The difference lies in the fact that in an ULIP the return on investment is clearly mentioned, the break-up (source) as well as the performance of the investment is known. Whereas, in a traditional policy, the ROI is in terms of bonuses received each year. Here, the break-ups and other details are not mentioned.
Another point to be noted is that, in an unit linked the policy holder has the choice of choosing the investment type whereas in a traditional policy, the investment is at the sole discretion of the insurance company.
A traditional insurance is aimed at savings as well as risk cover, whereas a ULIP is more about wealth generation. Naturally, the risk for the latter is higher which is why; ULIP is usually availed by active investors and traditional policies by passive investors.
- What is the difference between ULIP and mutual funds?
A mutual fund is considered as an option for short term benefits while a ULIP is considered for a long term. A ULIP is essentially a mutual fund which in addition provides life insurance cover as well.
A mutual fund is cheaper since it is availed over a short period of time and there is a prior upper limit to the expenses incurred in mutual funds which is not so in the case of ULIPs.
- Which would be the best investment option?
An investment should be made based on the investor's current financial status in mind and at the same time not losing sight of his/her future financial status. It is about making a wise decision at the right time. Whether you are looking to combine it with insurance or not - is entirely up to you. Whatever you choose, don't forget to read the fine print!
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