Understanding the difference between Insurance and Investment
Where insurance is essentially used for risk protection and rather means the pay-out in case of certain unforeseeable risks, such as, death, illness, or accidents, investment is more about producing more wealth from one’s money by allocating it into assets such as stocks, bonds, or mutual funds for returns over a period of time. All investments carry some level of risk and the potential of either capital gain or loss.
Of course, while insurance seemingly acts as protection against risk, investment is basically an activity that invests for growth. For example, term life insurance carries very little risk, but returns are paid only upon actualization of a claim. Investments, on the other hand can earn profits and are subject to market fluctuations. Insurance products are often illiquid in most cases, and most investment schemes allow easy resale. Both insurance and investment products confer tax benefits in different ways.
WHAT ARE ULIPs? An understanding:
ULIPs are hybrid financial products that provide life insurance protection along with some form of investment avenue. They essentially provide insurance protection along with the growth possibilities of investments in a variety of market-linked instruments such as equities, bonds, or mutual fund-like portfolios.
A Unit Linked Insurance Plan, or ULIP, is a hybrid product that combines the benefits of insurance and investment. Here is how it works and the relationship between the two components:
Insurance Component:
In a ULIP, there is always an allocation of the premium paid towards providing life insurance coverage; thus, in the event that the policyholder dies during the term, there would be an amount paid to the beneficiary as the death benefit, either the sum assured or the value of the investment fund, whichever is higher.
Investment Component:
The remaining premium is invested in different market-linked instruments such as equity funds or debt funds or even a combination of both. The investment, however, remains largely the choice of the policyholder, and the returns thus arising would be directly linked with the performance of the funds.
ULIP- some of the key features are:
More Flexibility in Investment: The returns generated from such premiums can be reinvested at the directions of the policyholder, including, at his option, high-risk (equity) to low-risk (debt) investments. Further, during the policy term, such a policyholder can swap between such funds.
Tax Benefits: Premiums paid towards ULIPs are taxes deductable under Section 80C of the Income Tax Act of India. Even the maturity proceeds could be tax-free under Section 10(10D), subject to conditions.
Long-term investment- The main objective of a ULIP is to create a long-term fund. There is actually a 5-year lock-in period which is usually attached to such schemes to let the partial withdrawal happen at the end of such term. The more you keep this investment, the higher your compounding returns will be.
Charges-In a ULIP policy, several charges occur, starting from premium allocation charges up to the fund management charges, mortality charges for the purpose of life cover, and surrender charges in case one wants to withdraw the early payouts. All these charges are deducted from the premium before its investment.
ULIPs vs. Traditional Insurance and Mutual Funds
Traditional Insurance: The pure life cover is the primary product, and it does not have any market-linked investment components.
Mutual Funds: They are pure investment products and do not provide any kind of life cover. They are typically costlier than ULIPs, but no insurance component is provided along with the mutual fund.
Who May Invest in ULIPs?
ULIPs are suitable for:
1)People who want to have a single product with a mix of insurance and investment.
2)Long-term investors with specific financial objectives, such as retirement planning, financing children’s education, or a house.
These are actually risk-tolerant investors who would like to be exposed to the equities market while having the comfort of some form of insurance.
CONCLUSION
ULIPs thus serve as a great alternative for those who want their savings to grow with time along with also safeguarding the financial capital of the family. Increasingly, one needs to be cognizant of charges and have a long-term perspective before investing in any plan of ULIPs. They are actually a unique financial product that offers insurance with room for growth. They help one achieve life cover for their families as they collectively amass wealth through investments in the market. One needs to know the charges and risks attached before putting their money.