Investing in a financial product that can secure your life and family’s economic future is essential, primarily due to the ongoing coronavirus (COVID-19) pandemic. Life insurance is an ideal financial product that can ensure the family’s financial aspirations when you are no longer around. Out of the many life insurance plans available in the market, investing in ULIP is one of the best options. Let us first understand what is ULIP policy before knowing the facts of the premium associated with it.
Unit-Linked Insurance Plan (ULIP) is a financial instrument that provides the dual benefits of life insurance and investment. It is one of the most popular financial products available in the market because of its unique benefits. When you invest in ULIP, the premium that you pay towards the policy is used to meet two different purposes. A part of the premium gets invested in the capital market in equity or debt fund as per your risk-taking capability to grow your investment. If you plan to purchase a ULIP investment plan, you must understand the details related to its premium.
Things to know about ULIP premiums
Here are some vital factors that you should know about ULIP premiums before investing your hard-earned money.
- Premium Allocation Charge (PAC)
The insurer charges a fixed percent of PAC on the premiums that you pay towards the policy. Generally, the PAC is high during the initial years of the policy. It covers the soliciting expenses and the commissions of the insurance agent. After deducting the PAC, the insurer invests the balance amount in various funds. For example, if the PAC is 12%, then on an annual premium of INR 50,000, the insurer will subtract INR 6,000 and invest the remaining INR 44,000 in equity, debt, or a mixture of both.
- Tax exemption
It is one of the ULIP benefits that makes it a popular investment instrument over other financial products available in the market. As per Section 80C of the Income Tax Act, 1961, you can claim the maximum permissible limit of INR 1.5 lakh per annum as a deduction towards the premium paid. However, you should know about certain conditions to avail of this advantage:
- If you purchase the policy after April 1, 2012, the yearly premium paid should be equal to, or less than 10% of the sum assured
- If you buy the policy before April 1, 2012, the annual premium paid must be equivalent to, or less than 20% of the sum assured
- Premium on top-ups
One of the additional ULIP benefits is that it allows you to invest an extra amount in high-performing funds and grow your corpus. This investment is known as a top-up premium. Remember that the top-up premium will be considered only for investment in equity oe debt funds and not for the insurance component. Insurers charge a PAC of 1 to 3 percent on top-up premiums.
- Premium redirection
ULIP investment plan gives you the flexibility to shift from one fund to another based on the market’s performance with the help of a premium redirection facility. With this option, you can monitor the fund’s performance and avert the unnecessary risks of the equity market by shifting your investments to a debt fund, which is low-risk. Insurers levy a premium redirection charge if you transfer your money from one fund to another.
These factors can help you understand all the aspects of ULIP premium and how it can affect your policy. It is advisable to invest your hard-earned money in ULIPs after clearly having an idea of the various elements and charges levied on the policy. The returns offered by ULIP are significantly high even though there are multiple charges associated with it. Therefore, search for a ULIP that can meet your financial goals in the future.