Certain insurers have been extensively marketing their mid- and small-cap funds. In order to market Ulips, certain distributors and agents have also capitalized on the success of mutual funds (MFs).
Life insurance firms have been ordered by the Insurance Regulatory and Development Authority of India (IRDAI) to refrain from marketing Unit Linked Insurance Plans (Ulips) as investment products. Additionally, it has pushed them to reveal their risk factors.
Reduced Ulip-MF misunderstanding might
Certain insurers have been extensively marketing their mid- and small-cap funds. In order to market Ulips, certain distributors and agents have also capitalized on the success of mutual funds (MFs). Many buyers don't realize they are purchasing from a fund house or an insurance when they make their purchase.
Less knowledgeable investors may mistakenly believe they are making an investment in a fund if they take a quick look at certain insurers' marketing. In actuality, their investment would go into a Ulip, which would then invest in a fund. A mortality fee for the insurance coverage is borne by the policyholder in a Ulip, according to Sebi-registered investment adviser Deepesh Raghaw (RIA).
As one ages, the mortality charge rises.
Arvind Rao, founder of Arvind Rao and Associates, states that "a higher charge is deducted in the case of senior citizens, leading to a bigger impact on the maturity amount."
In order to clear up investor uncertainty, insurers may now emphasize Ulips' investment and insurance components after the IRDAI's instruction.
Lock-in: Occasionally helpful
Ulips are locked in for five years.
Investors who use funds intended for long-term objectives for short-term objectives or who panic and take money out of equity mutual funds (MFs) during market downturns may find this helpful.
In a Ulip, the maturity amount is tax-free if the premium is up to Rs 2.5 lakh annually. Additionally, fund rebalancing is tax-free. There is a 10% tax on long-term capital gains in equities mutual funds.
Ulips provides a premium feature waiver. According to Raghaw, "you can ensure through a Ulip that she gets it even if you are not around if you are saving for your child's education and want to set aside a certain sum for her when she is of college-going age." In the event of a term plan, the payment is made to the family, who may choose how to use it.
Problems with liquidity
Having liquidity is difficult. According to Vishal Dhawan, chief financial planner of Plan Ahead Wealth Advisors, "you cannot pull out money in the first five years if you have an emergency requirement."
As a person ages and becomes wealthy, her need for life insurance decreases. There is no coverage decrease allowed with combo products.
According to Raghaw, the mortality fee on a Ulip is often more than that of a term plan.
In a pure investment product, the returns are the same for two investors, ages 30 and 55, who put the same amount of money into the same fund. According to Raghaw, "the elderly person receives a lower return as she pays a higher mortality charge in an insurance-cum-investment product." The possibility of continuing to have inadequate insurance also exists.
If the fund you invested in with a Ulip performs poorly, you are locked in and cannot switch to another insurer's fund until the lock-in period expires.
Execute these tests.
Prior to purchasing a Ulip, choose your time horizon. "Ulips are a great product for clients who think about building wealth over a period of more than ten years," said Piyush Trivedi, head of Kotak Mahindra Life Insurance Company's alternative, digital channels, product marketing, and health tech division.
In order to take advantage of the deduction, investors should also assess their capacity to pay premiums, their need for liquidity, and if they have enough room under Section 80C.
There are two varieties of ulips: type I and type II.
In a type I Ulip, the nominee receives the greater of the insured amount or the investment value in the case of the policyholder's passing. The nominee in a type II Ulip receives both the investment value and the amount covered. "Select a kind I Ulip if you are investing in a Ulip for returns. Type II is preferable if you are also investing for insurance coverage, according to Raghaw.
Examine the historical performance of the insurer's different funds prior to making an investment. A term plan-MF combination is the best alternative for investors seeking more flexibility (liquidity, opportunity to lower cover).
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