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In this policy, the investment risk in the investment portfolio is borne by the policyholder.
Kotak e-Invest
Features
Ref. No. KLI/22-23/E-BB/492
ULIPs are becoming more popular as an investment option. They may be the best choice if you are a first-time investor because they offer much flexibility while reducing risks. However, it is only fair to understand the ulip advantages and disadvantages before investing.
Investing is a habit that prepares you for the future and helps generate wealth. For investors seeking both insurance and investment opportunities, ULIPs offer a unique blend with potential benefits. However, understanding unit linked insurance plan advantages and disadvantages is crucial for making an informed decision about suitability.
Unit Linked Insurance Plans (ULIPs) are a distinctive financial planning tool that uniquely combines life insurance coverage with market-linked investment opportunities. When you invest in a ULIP, a portion of your premium secures life insurance cover for your loved ones, while the remainder is invested in market-linked funds of your choice, such as equity, debt, or balanced funds. This structure offers policyholders the flexibility to align their investments with their risk appetite and financial goals.
Furthermore, premiums are typically paid periodically (monthly, semi-annually, or annually) throughout the policy term. Furthermore, ULIPs come with a mandatory lock-in period of 5 years, thereby encouraging long-term investment discipline. There is an array of ULIP advantages and disadvantages, which require careful consideration to maximize returns. Let’s understand these.
There is a long list of advantages of ULIP plans that includes tax benefits, premium redirection, and flexible withdrawal. Let us explore more of the ULIP benefits:
ULIPs are ideal for consumers who want to put money down for a long-term objective since short-term market volatility provides lower returns. These long-term market investments produce handsome returns.
Tax-free and tax-advantaged returns are available through ULIPs. The premiums for ULIPs are tax-deductible, and the death payments received are also tax-free. In addition, the secure payout or the fund’s value of investments is also available to the policyholder, and these returns are not taxed.
After the lock-in period, policyholders can withdraw partially from the policy if they do not exceed 20% of its fund value. Furthermore, these withdrawals are not subject to taxation.
ULIPs can generate good returns depending on the fund in which one invests. For instance, if the fund invests heavily in the capital markets, it will benefit from rising stock prices.
ULIPs support disciplined investing because they are made to help you achieve important financial objectives. With such a strategy, you can save your long-term goals to meet immediate requirements.
The funds received from a ULIP can be used to achieve your primary life objectives, like purchasing a home, paying for your children’s higher education, or guaranteeing a happy retirement.
ULIPs let you add periodic top-ups to your investment, giving you the flexibility to capitalize on market opportunities and accelerate your wealth creation. Top-up premiums qualify for income tax deductions under sections 80C and 10D, lowering your tax burden. Unlike shares, equity mutual funds, and ELSS, where profits above ₹1 lakh attract long-term capital gains tax (LTCG), ULIPs offer complete exemption from LTCG.
Another ULIP plan benefit is that you can redirect future premiums to a different fund, ensuring your investment stays aligned with your goals and market opportunities. You can adjust your investment strategy with flexible premium redirection, protecting your portfolio from risks while maximizing potential gains. This feature helps you adapt your investment mix with future premium allocation to different funds, meeting your evolving financial needs and capitalizing on market shifts.
ULIPs offer the potential for higher returns compared to traditional insurance products because a portion of your premium is invested in market-linked instruments such as equity, debt, or balanced funds. This allows your investment to grow with market performance, providing an opportunity for significant wealth creation over the long term.
ULIPs are known for their adaptability. Policyholders often have the flexibility to choose from a range of fund options based on their risk tolerance, select premium payment frequencies, and, in some plans, adjust the sum assured or top up their investments.
At its core, a ULIP provides essential life insurance coverage. In the unfortunate event of the policyholder’s demise during the policy term, the nominee receives the sum assured or the fund value, whichever is higher. This ensures financial security for your loved ones in your absence, helping them manage immediate expenses and future financial goals.
ULIPs empower you to actively manage your investments through fund switching. You can move your accumulated corpus from one fund type to another based on your changing risk appetite or market outlook. Most insurers offer a certain number of free switches annually, allowing you to optimize your portfolio without exiting the plan.
To enhance your protection, ULIPs often come with the option to add riders at a nominal additional premium. Common riders include critical illness riders, accidental benefits, permanent disability riders, etc.
Some ULIPs offer guaranteed additions to boost your fund value. These are specific percentages of the annual premium or fund value that the insurer adds to your policy at predefined intervals or on maturity, irrespective of market performance. This feature provides an element of certainty and enhances your overall returns.
To encourage policyholders to stay invested for the long term, many ULIPs provide loyalty benefits. These are typically credited to your fund value in the form of extra units or a percentage of the fund value at specific policy milestones, for instance, after the 10th, 15th, or 20th policy year.
This is a valuable rider in the ULIPs. If the policyholder suffers a specified event, such as critical illness or permanent disability, all future premiums are waived by the insurer. However, the policy continues with all its benefits, ensuring that the intended financial goals are met even in unforeseen circumstances.
While ULIPs offer a combination of insurance and investment, they also come with several disadvantages:
ULIPs typically have a high cost attached to them. These fees are initially higher because they cover the costs of managing your funds and administering policies. So, a sizable portion of your premium is first lost to charges. However, as time goes on, both your expenses and your potential profits rise. Therefore, all it takes is patience.
A primary characteristic of ULIPs is that the investment component is directly exposed to market fluctuations. Since returns are linked to the performance of the chosen equity, debt, or balanced funds, they are not guaranteed and can be volatile. Incorrect fund choices or ill-timed decisions can lead to suboptimal returns or even capital erosion, particularly in the initial years
Most insurers will provide you with free fund transfers up to a specific amount. After this point, switching is fee-based, and you must truly balance your prospective earnings against the fees incurred.
Before the 5-year lock-in period in ULIP, you cannot withdraw your money. Even if you cancel your ULIP within five years, you must wait until the lock-in period ends to receive your money.
While offering some life insurance cover, ULIPs offer lower death benefits than dedicated term insurance plans for the same premium. ULIPs are more market gain-centred schemes as compared to pure life or term insurance plans
Unlike more straightforward investment options, ULIPs often require active monitoring and switching between funds to optimize returns. You have to keep an eye on the market for better results. It can be time-consuming and may only be suitable for some.
ULIPs can be a complex financial product, offering both benefits and drawbacks. Here is a breakdown of the pros and cons to help you decide if it is right for you:
| Pros | Cons |
|---|---|
| Potential for market-linked returns: Unlike traditional life insurance, ULIPs invest a portion of your premium in the stock market, offering the possibility of higher returns. | Exposure to market risk: ULIPs are investment-linked, so your returns can fluctuate with the market. You could potentially lose money if the market performs poorly. |
| Life insurance cover: ULIPs combine investment with life insurance protection, providing a death benefit to your nominees in case of your untimely demise. | High initial charges: ULIPs typically have high initial charges (front-load) that can eat into your investment significantly in the early years. |
| Lock-in period: Most ULIPs come with a lock-in period of 5-6 years, during which you cannot withdraw your money without facing surrender charges. | Limited liquidity: Early withdrawals from ULIPs are often subject to surrender charges, making them less liquid than some other investment options. |
| Transparency and control: Some ULIPs offer investment fund choices, allowing you to tailor your investment strategy to your risk appetite. | Complex product: ULIPs can be complex financial products with various charges and features. Understanding them fully before investing is crucial. |
| Tax benefits: Premiums paid for ULIPs qualify for tax deductions under Section 80C of the Income Tax Act, subject to conditions. | Maturity proceeds taxed: Maturity proceeds from ULIPs are generally taxable if invested for less than 5 years. |
Unit linked insurance plan advantages and disadvantages are dynamic and require thorough understanding of the market to maximise benefits. It can provide the best of both worlds: life insurance and returns. If you have invested in a ULIP holding a significant share, your funds could earn a higher return if capital markets perform well. If you plan to invest in securities that provide a variety of rewards all in one place, ULIPs are ideal. With thoughtful investment planning, you can avoid the disadvantages of ULIPs and avail yourself of numerous benefits. Always remember to go through both the advantages and disadvantages of ULIP before making a decision.
Key Takeaways
1
Individuals seeking a long-term investment horizon (typically 10+ years) who desire the dual benefit of life insurance coverage and market-linked wealth creation potential. They should also be comfortable with market-related risks and may be looking for tax benefits under Section 80C.
2
Yes, most ULIPs offer the flexibility to switch your accumulated funds between different available fund options, such as equity, debt, and balanced, a certain number of times annually, often free of charge. This allows you to adjust your investment strategy as per market conditions or your risk appetite.
3
No, ULIPs are generally not suitable for short-term goals (less than 5 years). They have a mandatory 5-year lock-in period, and their market-linked nature means returns can be volatile in the short term. ULIPs are designed for long-term wealth creation.
4
Insurers provide a grace period (usually 15-30 days) to pay the missed premium. If not paid within this period:
During the lock-in (first 5 years): The policy may be moved to a ‘discontinuance fund’ after deduction of applicable charges, and life cover may cease or reduce.
After the lock-in: You may have options like converting it to a ‘paid-up’ policy with reduced benefits or surrendering it, as per policy terms.
5
Yes, one of the advantages of unit linked insurance plans is that they offer loyalty additions or bonuses. These are extra units or amounts credited to your fund value by the insurer for staying invested for a specified long duration, for instance, after 10 or 15 years, rewarding policyholder commitment.
6
Yes, there is typically a minimum premium amount for ULIPs. This amount varies depending on the specific plan, the insurer, and the chosen premium payment frequency.
7
ULIPs differ from traditional policies (like endowment or money-back plans) primarily in their investment component and transparency:
ULIPs offer market-linked returns, greater transparency in charges, and flexibility to choose and switch funds. Returns, however, are not guaranteed. Traditional plans, on the other hand, typically provide guaranteed or pre-defined returns, are less transparent about their cost structure, and offer limited investment flexibility.
8
Yes, you can generally surrender or exit your ULIP after the mandatory 5-year lock-in period. After this period, discontinuance charges are usually nil, meaning you can withdraw the prevailing fund value. However, it is always best to confirm specific terms with your insurer.
Amit Raje is an experienced marketer who has worked in various Fintechs and leading Financial companies in India. With focused experience in Digital, Amit has pioneered multiple digital commerce in India. Now, close to two decades later, he is the vice president and head of the D2C business department. He masters the skill of strategic management, also being certified in it from IIMA. He has challenged his challenges and contributed his efforts in this journey of digital transformation.
Prasad Pimple has a decade-long experience in the Life insurance sector and as EVP, Kotak Life heads Digital Business. He is responsible for developing user friendly product journeys, creating consumer awareness and helping consumers in identifying need for life insurance solutions. He has 20+ years of experience in creating and building business verticals across Insurance, Telecom and Banking sectors
In this policy, the investment risk in the investment portfolio is borne by the policyholder.
Kotak e-Invest
Features
Ref. No. KLI/22-23/E-BB/521
The information herein is meant only for general reading purposes and the views being expressed only constitute opinions and therefore cannot be considered as guidelines, recommendations or as a professional guide for the readers. The content has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. Recipients of this information are advised to rely on their own analysis, interpretations & investigations. Readers are also advised to seek independent professional advice in order to arrive at an informed investment decision. Further customer is the advised to go through the sales brochure before conducting any sale. Above illustrations are only for understanding, it is not directly or indirectly related to the performance of any product or plans of Kotak Life.
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