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ULIP stands for Unit Linked Insurance Policies combining the investment and insurance needs of a person. ULIPs have become extremely popular among investors as a great tool for tax saving and wealth creation.
A ULIP provides a reduction in taxes, a life cover, and an appreciation in the invested amount.
People who want to gain substantially from ULIPs should invest in it for a minimum of 10 years. ULIPs provide the best results only when one is investing in it from a long-term benefit. Also, one cannot rely only on a ULIP to fulfil their insurance needs. It is important that you avoid the following mistakes while buying a ULIP.
Do not invest only for the tax-benefits
ULIPs are eligible for tax benefit under section 80C of the Income-tax Act. It is considered one of the products for INR 150,000 tax deduction. Many people buy ULIPS only because it is a section 80C option and helps in reducing taxes.
If you want the tax-benefit, you cannot withdraw the invested amount for a period of 5 years from a ULIP. Where you withdraw money before 5 years, you have to pay taxes on the money received. Thus, you must look at the long-term benefit before making a decision of investing in ULIPs.
Do not invest only for a life cover or insurance
A general ULIP with a premium of 1 lakh INR per annum will provide you with the insurance cover of INR 10 lakhs. This ULIP is for a period of 10 years. Thus, the sum assured is equal to the amount that you would pay a premium per annum for the ULIP.
Before rushing into buying a ULIP for the purpose of insurance, just think if the sum assured of INR 10 Lakhs is enough for your family? Will it actually serve the purpose of insurance? You can refer our Article – How much cover you need in term insurance. This shall help you understand what amount of cover you actually need and how pure term insurance is the best product for your insurance needs. Do not substitute the same with ULIPs.
Also, if you stop paying the premium amount, you lose on your insurance benefits.
Do not invest only for equity growth
ULIP is also a fund which is eventually invested in various financial products. ULIP gives you the option to select the kind of fund (i.e. pool of investment products) that you desire to invest into. Thus, you must decide based on your risk appetite, your understanding of the fund or your financial advisor’s advice. Refer to Article – different kinds of ULIP funds_
Your investment decisions must be based on your defined goals and should never be a random allocation.
Do not stop paying premium after the first premium or anytime later.
Where you stop making the premium payments for your ULIPs, the following things may happen:
- You will not be able to withdraw the amount until the lock-in period of 5 years.
- If you stop paying your premium after the first year and withdraw the amount after the lock-in period, you do not get paid on the basis of the Net Asset Value of the year in which you are getting paid. Rather the money you get is based on the Net Asset Value of the year in which you stopped paying the premium.
- The amount that you would receive after completion of 5 years would be after deducting various charges like fund management, annual charges, and surrender charges.
- The insurance cover would be stopped immediately and there would be no life cover.
- The death benefit will be limited to the NAV (Value) of the Fund/Money invested.
Do not overlook the charges
There are many charges in a ULIP like premium allocation charges, fund management charges, mortality charges etc. These can amount to easily 4%-5% of the premium amount invested in a ULIP.
After reading this article, you may feel that ULIPS are not a good investment option. It is not so. However, there are many things that one must look at before making an investment decision which includes things you must do and things you must not do.