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Why shouldn’t you surrender your ULIP?


What is the Role of the Lock-in Period in ULIPs?

Unit-Linked Insurance Plans (ULIPs) have increased in popularity recently. The major reason for this is that they are not affected by the Long-TermCapital Gains tax on equity investments. This is because ULIP policies are considered insurance products.They have become even more attractive as investors have the option of switching between equity and debt fund investments without attracting tax.

What is a ULIP policy?

A ULIP policy is a life insurance product, where a part of the premium paid goes towards life insurance, and the rest is invested. How and where it is invested depends on the investors’ appetite for risk. The investment options are debt-oriented or equity-oriented.

ULIP investments are tied with fluctuations in the market, and it is important that a clear assessment of the desired risk is taken into account before choosing your desired ULIP policy.

As mentioned earlier, investors can choose to switch between equity investments and debt investments, depending on their risk appetite. While switching does not attract taxes, there is most likely a lock-in period that the insurer will need the investor to complete before switching.

This can be most useful to investors with long-term investment plans and are likely to experience changes in their risk appetite over time.

There are a lot of low-cost ULIP policies available that are meant to help investors achieve their financial targets.

What are the types of ULIP policies?

There are various types of ULIP investments available in the market today:

Equity funds: Primarily high-risk investments with potentially higher returns.

Income, fixed-interest, and bond funds: Medium risk, with a potential medium to low reward.

Cash funds: These are low-risk instruments; however, the benefits are also minimal.

Balanced funds: These offer a mix of risks and are considered to be the most stable. The returns could be higher than the other low-risk options.

Now the above-mentioned are types of ULIP investment options. Another important aspect to know before investing is the type of ULIP policy that suits you best. They are called Type 1 ULIP Policy and Type 2 ULIP Policy.

Type 1 ULIP Policy

If the policyholder is no longer able to pay their premiums because they are no more, type 1 offers the investor’s beneficiaries either returns on the funds invested or the insurance premium. The insurance company pays out whichever of the funds is higher.

If you have been paying premiums towards an insured sum of Rs. 30 lakh, part of your premium has been invested.

Let’s say that the part invested has brought in returns of Rs. 50 lakh. The investor’s beneficiaries will receive Rs. 50 lakh.

Type 2 ULIP Policy

With this type of ULIP policy, an investor’s beneficiaries will receive the sum assured, not returns on the funds. This is the case irrespective of which amount is higher.

Using the same example mentioned above, where the sum assured is Rs. 30 lakh and the returns on funds invested totals to Rs. 50 lakh, the beneficiaries would receive Rs. 30 lakh.

The main difference between these policies is what happens when the investor is no more.

The risk that the insurance company carries with a Type 1 ULIP policy reduces as time goes by. This is because the investor’s returns on investment are likely to keep increasing over time.

When it comes to Type 2 ULIP policies, insurance companies have the same risk no matter the time as they are bound to pay out the assured amount and not the returns on funds.

So, which is better?

Take the time to sit down with your insurer and understand what kind of risk appetite suits you best. Understand what duration you want to pay premiums for. Your insurer will use a ULIP plan calculator to show you the potential returns that you could have with each of these options. Explain what your financial goals are, and your trusted insurance provider will guide you in choosing the right ULIP policy.

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