Why choose ULIPs over traditional life insurance plans

The insurance sector has penetrated in India on a large scale. Due to the growth of the insurance industry, many insurance companies have introduced new life insurance products in the market. Typically, life insurance products can be divided into two categories: traditional and non-traditional policies. While traditional policies like endowment plans, term insurance, etc. have been in the market for long, the new-age products like a Unit Linked Insurance Plan (ULIP) have been gaining popularity for its diverse range of features and benefits.

Before you purchase a ULIP plan, let’s understand what a ULIP policy is in detail:

What is ULIP policy?

A ULIP plan is a unique financial product, which combines the benefits of investment and insurance under a single integrated plan. While the insurance element can look after the financial well-being of the family, the investment aspect can allow you to diversify your portfolio. A ULIP plan can offer death benefits to your loved ones in your absence, which can be received either every month or every year in a lump-sum amount based on your preference.

While selecting a life insurance policy for you, you might often find it difficult to choose between traditional plans and a ULIP policy. Although both these insurance options can provide different perks, a ULIP policy can be beneficial for you for many reasons. Therefore, let’s go through the top three reasons, which indicate “why should I invest ULIPs” over traditional life insurance plans:

  1. Tax benefits

A ULIP policy can allow you to reduce your tax liability since it falls under Section 80C and Section 10(10D) of the Income Tax Act, 1961. Unlike traditional life insurance plans, you can receive dual tax benefits on the premium as well as the maturity proceeds. When you purchase a ULIP plan, you can be allowed to claim a tax deduction up to Rs. 1,50,000 on your taxable income in accordance with Section 80C. In addition to this, you can obtain a tax-free amount during the maturity of the ULIP policy.

  1. Charge structure

Today, a ULIP policy can offer affordable costs due to the introduction of the new rules by the Insurance Regulatory and Development Authority (IRDA). The charges that you pay towards your ULIP policy can be bifurcated as follows:

  • Mortality charge: It can be paid in return for the life coverage that your insurance company provides.
  • Fund management charge: It can be deducted for the management of the ULIP funds: equity funds and debt funds.
  • Premium allocation charge: It can be levied to recover the initial expenses, which are incurred on the purchase of the ULIP policy such as the distributor fee, underwriting costs, and so on.
  • Policy administration charge: It can be deducted for the administrative expenses that are paid for the maintenance of the ULIP policy.
  1. Transparency

After the new regulations of IRDA came into force, many insurance companies can be compelled to provide a benefit illustration to you at the time of purchase. A benefit illustration breaks down the entire working of a ULIP policy in detail in front of you. Moreover, it can ensure transparency between you and your insurer to the maximum. The document can consist of the following data:

  • Features
  • Benefits
  • Charge structure
  • Returns
  • Surrender value

In a nutshell, a ULIP product has re-emerged in the market after several changes made by the IRDA. With the new guidelines, a ULIP plan has become an attractive product in the market, which can safeguard your future within the family as well as your participation in the capital markets. Therefore, choose a ULIP plan over traditional life insurance product to reap the benefits that can help you to secure your future financially.