Introduction
Finding the best insurance plan for a brighter future might be difficult. But what if you get to know that you can combine the advantages of insurance and investment into a single policy? It’s true! Unit-linked insurance plans, often known as ULIPs, allow you to increase your wealth while also providing the benefit of a life insurance policy.
What is a ULIP?
Unit Linked Insurance Plans, or ULIPs, are investment instruments with specific goals designed to help you achieve your financial goals. ULIP investment can assist you with achieving your financial objectives, including early retirement, saving for your kid’s higher education, and a secure future. They stand out as a powerful tool, making them an attractive option for individuals seeking to customize their financial journey.
Funding Choices for ULIPs
You can select from a number of market-linked funds through ULIPs. These are appropriate for all types of investors, regardless of your risk profile: aggressive, low, or cautious. The main categories of ULIP funds that insurance companies commonly provide are examined below.
- Equity Funds: Equity funds in ULIPs primarily invest in listed equity stocks, aiming for capital appreciation. They can be classified as small-cap, mid-cap, or large-cap funds based on their stock choices. These funds offer potentially higher returns over the long term. These funds are suited for long-term investors willing to take higher risks.
- Debt Funds: Debt funds in ULIPs invest in the debt market, including various fixed-income securities like government bonds and corporate debt. These funds offer more stable returns and lower risk than equity funds, making them a suitable choice for those seeking insurance and market-linked investment with lower risk exposure.
- Liquid Funds: These ULIP funds, also known as cash or money market funds, invest in liquid investments such as money markets and short-term debt with strong credit ratings. However, they tend to provide lower returns than equity or long-term debt.
- Hybrid Funds: Hybrid ULIP funds are a combination of equity and debt assets to balance risk. They offer capital appreciation from equity and steady income from debt, moderating overall risk. If you are uncertain about equity or debt investments, hybrid ULIPs offer a balanced approach to benefit from both asset classes within a single plan.
Benefits of Investing in ULIP
Now that you know what is ULIP and what funding choices are, it is easier to comprehend the dynamics of ULIP investments. While primarily an insurance policy, ULIPs require policyholders to pay premiums, with a portion dedicated to life insurance coverage and the rest directed into various funds, such as equity, debt, or a hybrid combination.
Dual benefits
ULIPs are a flexible option if you are looking to combine your financial objectives with insurance coverage since they provide the dual benefits of life protection and investment growth. As a result, if you are ready to take on more risk with your investing, you can choose equity-oriented funds.
In contrast, if you wish to safeguard your earned funds without exposing them to risk, the advisable route is to invest in debt funds. You are free to select the type of fund(s) you would like to invest in, as the ULIP’s investing element helps achieve your financial objectives.
Fund switching
Investing in ULIP allows you to switch between debt and equity funds, known as the fund-switching feature in ULIPs. This allows you to adapt to market performance effectively. For example, if some funds are not performing well, you can adjust your investment portfolio by switching to funds that offer superior returns.
Moreover, the fund-switching feature can be employed to align with evolving life objectives. For instance, if you initiate investing in ULIPs early in life when financial obligations are fewer, you can choose higher-risk investments like equity funds. However, as you progress and your financial responsibilities grow, you can switch to lower-risk debt funds.
Tax benefits
ULIPs offer multiple tax benefits to the policyholders. Firstly, the premiums paid towards ULIPs are tax-deductible under Section 80C of the Income Tax Act, 1961, up to a limit of Rs.1.5 lakhs. Secondly, the investment growth within the ULIP remains tax-free as long as the funds are not withdrawn.
ULIPs also provide the flexibility to switch between funds, and these switches do not incur any tax liabilities. Lastly, in the event of the policyholder’s demise during the policy term, the death benefits are tax-exempt for the beneficiary.
Conclusion
ULIPs, or Unit Linked Insurance Plans, offer a dual advantage by combining life insurance and investment in a single product. While the life cover ensures financial security for your loved ones in unfortunate circumstances, the investment component helps you achieve your financial goals.
ULIPs allow you to choose between high-risk equity funds for potentially higher returns, low-risk debt funds, or a balanced mix based on risk tolerance. With the flexibility to switch between funds, ULIPs are suitable for various objectives like homeownership, education, retirement, and more. With ULIPs, you have the power to shape your financial journey, making it one of the best forms of investment.