Jan 22, 2009

ULIPs - 10 Top Most Factors to Know About

It’s tax-planning season again. During the last quarter of a financial year (January to March) the most talked about topic especially in office corridors is the tax saving under section 80C of the Income Tax Act. The first and most obvious choice of people is life insurance. And among life insurance products, the most popular policies are Ulips. To know, whether the decision to invest in life insurance as a tax saving tool is correct or not, please readSection 80C - 10 Smart Tips”. In this article, the topic of discussion is some known and unknown top most factors about Ulips.

Here are the 10 Top Most Factors or things to know about ULIPs:

Good Factors

1. Top most fact about UlipsInsurance cum Investment products
Ulips are insurance cum investment products and only way you can benefit from them is to consider them as long term financial products with a minimum tenure of 10 years.

While buying Ulips, insurance should be your most important consideration and investment should be the secondary motive.

2. Top most misconception about UlipsOnly equity linked
The most common myth about Ulips is that they are linked only to equity markets.

The fact is that there are various fund options (differs from company to company) available in case of Ulips. However, we can broadly categorize them into three types – 100% equity fund, balanced fund and 100% debt fund. There are also various other fund options available with varying degree of equity and debt allocations.

You’ve the flexibility to choose a fund option based on your risk appetite and if you wish, you can switch to another fund option at a later stage.

3. Top most benefit Ulips offer over traditional Insurance plans – Possibility to earn higher rate of return
Unlike traditional plans which invests almost their entire money in debt portfolio, Ulips give you full discretion to invest the money the way you want.

As already mentioned above, there are various fund options available with varying degree of equity and debt proportions. Further, once invested, you’re not bound and can make subsequent changes in the fund option according to your needs and risk appetite.

For a detailed comparison between Ulips and traditional life insurance plans, please read "Ulips vs Traditional Plans".

4. Top most good (or the best) thing about Ulip – Fund Switching Option
There is nil or negligible cost involved. Besides, there is no tax involved. And most of all, it is hassle free. The day mutual funds also start providing this fund switching facility, the only real edge Ulips have over mutual funds will be lost.

5. Top most Ulips available in the market
Please see “Best Ulips Based on IRR And Expense Ratios”.

Bad Factors

6. Top most reason for Ulips popularity – Large scale financial illiteracy
Undoubtedly, the most important reason behind Ulips popularity is that most of us don’t know what is life insurance and why and how much we need it?

The secondary reasons behind their popularity are—Ulips are better than traditional life insurance products and also the exceptional stock market returns during 2004-07.

7. Top most flipside of UlipsRiskier
Ulips are more risky than traditional life insurance plans. Actual risk depends upon the fund option chosen by you; greater the equity component, higher the risk. As the investment risk is borne by you, in case of a market down turn, you might have to bear huge losses. Just try asking someone who has invested in Ulips during the last few years.

8. Top most hidden factor about Ulips – IRR
IRR (Internal rate of return) is the major factor which is kept under wraps by the life Insurance companies to make it difficult for us to compare one Ulip with the other. If the life insurance companies start publishing this figure it will become a lot easier even for a layman to understand and find the low cost Ulips in a manner similar to the way we compare term plans. For other hidden facts please readUnravelling the Ulips – 5 Secrets You Should Know About

9. Top most bad (or the worst) thing about Ulips – The way they’re sold
Instead of selling Ulips as the long term life insurance products, advisors sell them as short term investment plans with tax incentives.

10. Top most reason to invest in Ulips – If you’re not financially savvy
Go for Ulips, if you’re not financially savvy and can’t separate your insurance needs from your investment and tax planning goals.

Also see:

1. SBI Life-SMART ULIP: Review
2. Life Insurance - Top Most Amazing Fact
3. Section 80C - 10 Smart Tips
4. Section 80C - Various Tax Saving Options
5. 5 Secrets about ULIPs
6. Tax Calculator

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