Why Invest in ULIPs? What are its benefits?
With investments, there are several options to choose from. Every individual has different investment goals based on their financial capabilities, risk appetite, and responsibilities. Gone are the days when people simply invested in a fixed deposit (FD) scheme or a post office scheme. With the rising inflation around the globe, the minimal returns of these investments have left people looking for other options. One such option that has gained popularity in recent years is the Unit Linked Insurance Plan (ULIP).
What is a ULIP policy?
To all the people new to insurance, might wonder “What is a ULIP policy?”. A ULIP is a combination of life insurance and investment. When you buy a ULIP, the amount that you pay as a premium is partially used towards providing you with life insurance and partially invested in the funds of your choice. The insurance aspect is quite simple to understand – you as a policyholder, get a life cover for the duration of your policy. Within that policy duration, if you lose your life in an unforeseen circumstance, your nominee will receive the sum assured. Once you understand how the life insurance component works, it is vital to know about the investment component. The investment component of a ULIP works differently from typical investments. It has proven to be advantageous to the policyholder by providing them with high returns over the years.
Why invest in a ULIP?
Every investment has its own set of pros and cons. There is no one ‘best’ investment for all individuals. However, there are several benefits of a ULIP that have made it a popular investment amongst the masses.
An opportunity for every investor
When you invest in a ULIP, you get to choose the funds you want to put your money in. Based on the risk that you will take, you get fund options to choose from. If you are risk-averse, you can invest in debt funds. While you can take some risks, you have the option to invest in equity funds. For the best of both worlds, there are moderate funds. They are a combination of both investment and insurance, providing moderate returns for the moderate risk involved. For investors with different risk appetites, what a ULIP does is offer options to all. Several insurance companies also offer goal-based ULIPs that enable them to achieve their long-term goals along with securing life.
Provides high returns
When an investor is looking for funds to invest in, one of the major factors they consider is the returns offered. ULIPs are known for their high returns in the long haul. Since the recurring premiums you pay are invested and compound over the years. The compounding ensures that you earn returns on your base investment and interest earned. This ensures that the policyholder is earning enough returns for the long haul.
Several tax benefits
One can avail of ULIP tax benefits on multiple levels. When you buy a ULIP, the premiums that you pay for your plan are exempt from taxes. This exemption is availed under Section 80C of the Income Tax Act. The death benefit that a nominee receives in case of the demise of the policyholder is also tax-free, according to Section 10 (10D) of the Income Tax Act. When your ULIP matures, the maturity amount that you receive is also subjected to exemptions based on certain conditions.
Flexible and adaptable
When you make an investment, you had certain goals and priorities, which can change. If you have invested in a ULIP, you do not have to worry about being stuck with an investment even if you are unhappy with it. You have the option to switch your fund allocation anytime you want, from debt to equity or vice versa. Since ULIPs are directly linked to the market, this allows you to make the most of market fluctuations.
Along with the ULIP tax benefits, high returns, and flexibility of investment, ULIPs also offer free partial withdrawals. After the lock-in period of 5 years, individuals can withdraw funds if they need them for free. This builds an emergency fund that a policyholder can access. These benefits have made ULIP a popular investment for the long haul.