ULIPs are distinctive investment products that also offer insurance. Your ULIP premiums are intended to accomplish two objectives: (1) obtaining a life insurance policy to offer financial protection and (2) making investments in equities, debt, or balanced funds to build wealth.
Some of the greatest ULIP plans available today are fourth-generation policies, which have premiums you can afford and zero to minimal policy allocation or administrative fees. But before you buy a policy, you must comprehend the particular characteristics of ULIP premiums, how they affect your insurance and all of the related terms and conditions.
Here are a few details that can assist one in comprehending the ULIP terms and conditions:
- Premium allocation charges (PAC): Premium allocation charges are typically regarded as front-loaded fees. In this case, a defined percentage of your ULIP premiums are taken out as fees, and the remaining amount is distributed to the equity, debt, or balanced funds of your choice. The assessed premium allocation fees are larger in the early years of your policy and decrease as time goes on. Depending on the size of your premium, how frequently you pay it (monthly, annually, etc.), and how you pay it, your allocation charges may change. You can use a ULIP calculator to estimate future returns and the value of a ULIP investment.
- Taxation: According to Section 80C of the Income Tax Act, tax deductions on ULIP premiums paid in a year are allowed up to a maximum of 1.5 lakhs. However, depending on whether the policy was purchased before or after April 2012, the premiums paid must be less than 10% of the sum assured or 20% of the total assured in order to qualify for these tax benefits. Additionally, Section 80C mandates that in order to qualify for tax benefits, premium payments must be made consistently for the course of the 5-year lock-in period; otherwise, the premium will be added to your income and subject to the appropriate taxation.
The tax benefits mentioned in the article may not apply if you opt for the new tax regime since many tax exemptions and deductions have been scrapped within the new regime. They are also subject to any changes in the law.
- Top-up premiums: Some of the greatest ULIP plans permit policyholders to make supplemental investments (referred to as top-up premiums) in addition to their regular ULIP premiums. The top-up premium is often only applied to the investment portion of your ULIP, not to the insurance portion. A specific percentage of the total premiums paid for the regular insurance should not be exceeded by the premiums paid to top up your ULIP. Depending on the policies of your insurance carrier, premium allocation fees for your top-up premiums could range from 1% to 3%. The estimated value of your ULIP investment can be calculated using a ULIP calculator based on the premiums, tenures, and other information you enter.
- Premium redirection: Policyholders may discover that their requirements and objectives alter over time. It would be necessary to adjust one’s investment objectives in accordance with their own changing personal and professional ambitions. ULIPs give you the finest redirection facilities to enable you to do just that. According to your changing needs, you can transfer your premiums from one fund to another.
Furthermore, because ULIPs are a market-linked product, it is essential to assess market trends and coordinate one’s investing strategy in order to benefit from them. You can swap between equity and debt funds based on your risk tolerance and the shifting market conditions. You’ll probably pay certain fees—commonly referred to as premium redirection fees—when diverting your premium.
- Minimum sum assured: The payout made to the policyholder’s beneficiaries upon the policyholder’s passing is known as the Sum Assured. The lowest premium-to-sum-assured ratio that the IRDAI will allow is referred to as a minimum sum assured (Insurance and Regulatory Department of India). By choosing a lower sum assured, you would reduce your insurance coverage while increasing the amount invested in debt or equity funds. One can currently choose a sum assured that is at least seven times their annual premium. Previously, only individuals who were 45 years or older could choose a minimum sum assured of 7 times their yearly premium, but the IRDAI declared late last year that even those under 45 could take advantage of this provision. However, it should be noted that choosing the minimal sum assured would not provide the policyholder with any tax savings on premiums, even though doing so would likely optimise their earnings from the market. Visit the official website of IRDAI for further details.
As a result, these concepts can help you comprehend how selecting the appropriate premium amount directly affects your insurance and the advantages that are available to you. Once you have a basic understanding of ULIP plans, the following step is to select the one that is ideal for you among the available possibilities.
Insurance is the subject matter of solicitation. For more details on benefits, exclusions, limitations, terms, and conditions, please read the sales brochure/policy wording carefully before concluding a sale.
