How beneficial is it to invest in ULIP? What are its advantages in terms of insurance, investment and tax
When it comes to financial goals, we generally want to invest in such places which have higher returns. In this sense, investors prefer Unit Linked Insurance Plans (ULIPs) because of the many benefits linked together in it. On one hand, there is a term plan which provides a life cover. If the policyholder dies during the policy term, then a lump sum amount is given to the beneficiary under this plan. But there is no investment in this plan. Whereas under ULIP, you not only get insurance cover, but you can also invest. ULIP is a special type of plan, in which double benefit is attached. In this, along with providing insurance, insurance companies also give investors an opportunity to invest.
How ULIP works
There are two benefits of investing under this plan. Not only do you get life cover like a term insurance plan, but apart from this, you are also able to invest. Under this, a part of the premium is used for life cover and the other part is used to generate returns by investing in debt or equity assets. When a person invests in a ULIP, he has to pay a fixed premium for the selected cover amount. Some part of this premium is used to provide insurance coverage, and the remaining part is invested in equity or debt instruments. In this, investors have the flexibility to choose between equity, debt and balanced options for their investment plan. Apart from this, they also have the option to switch between investment plans while paying the premium. Fund managers manage investments according to the type of fund and invest in debt or equity instruments. It is important to note here that as per IRDAI, the lock-in period for ULIPs is 5 years and how much return it will generate depends on the volatility of the market.
There are three advantages to one investment
One of the major advantages of a ULIP is the life insurance cover that it offers. By investing in ULIPs, one can save one’s family from future uncertainties. This ensures that the family is well looked after in case of the untimely death of the insured.
Another great advantage of investing in ULIPs is that you can generate returns by investing in equity and debt assets. Investing in ULIPs can be a better option for long-term goals. You can choose from debt, equity or balance options as per your requirement, risk appetite and investment tenure. ULIP plans allow policyholders to switch between multiple fund options such as equity, bond and hybrid funds. You can do this anytime and it doesn’t cost any money. Policyholders can choose to allocate future premiums among different ULIP funds depending on the prevailing situation. One can also change the allocation of future premiums from equities to bonds or vice versa to take advantage of market volatility. With a wide choice of funds, ULIPs can provide you with substantial returns from the market provided you stay patient and invest for the long term.
ULIPs are considered a tax-efficient instrument as compared to mutual funds as it allows policyholders to save tax at all stages. In ULIPs, switching between funds is allowed without any cost, whereas in mutual funds, switching between schemes attracts tax. Apart from the tax benefit while switching funds in a ULIP, there is also a tax exemption of up to Rs 1.5 lakh under section 80C of the Income Tax Act, 1961. The maturity amount of ULIP is tax-free under section 10(10D). By allowing investors to switch between debt and equity at no extra cost, ULIPs ensure that you as an investor build a better portfolio. This also reduces the risk.