What if you could have a single financial tool that insures you and your loved ones in times of difficulty? What if this tool also left you free to invest your capital to get returns? This is precisely the reason ULIPs could be the right option for you.
What is a ULIP Policy?
ULIP stands for unit-linked insurance plan, a tool that combines the features of an insurance policy with long-term wealth creation from investment.
ULIPs offer the kind of investment flexibility that mutual funds do. You get to choose whether your money is allocated to equity, debt, or a mix. Dedicated fund managers handle the assets classes. You could buy units in a simple investment strategy or have your money spread across many market-linked funds.
And of course, any of the unfortunate eventualities requiring the life insurance cover are taken care of, too.
Reasons for Investing in ULIPs
ULIPs offer many benefits over single-agenda plans, such as:
- Life Cover
A life cover is a great financial security against unpredictable events resulting in the loss of loved ones. This is true especially if the family has few breadwinners. Although life expectancies have improved with every century, there are more diseases and potential tragedies than ever before. It is better to know what a ULIP policy is and can do for you during unforeseen circumstances.
- Planning for Goals
ULIPs have a 5-year lock-in period. In any case, this instrument is better suited for long-term wealth creation. This gives a chance for the returns to compound. Thus, it is a good strategy for achieving goals like purchasing your dream home, vehicles, international vacations, your children’s higher education, etc. ULIPs promote financial discipline.
- Flexible Investment Options
- Fund option choice
ULIPs allow you to invest in the asset class that suits your financial goals, whether equity, debt or a hybrid fund. Based on your risk appetite and knowledge of market conditions, you can have money allocated or move it between different funds to maximise returns.
- Life cover choice
You can choose between an insurance plan that pays the higher between the sum assured or fund value; and the type that pays both. You can also increase the sum assured later on by picking a ULIP that allows that.
- Add riders
Riders increase the life cover. The most common riders are accidental death and disability riders.
- Free Look Period
ULIPs offer a 15-day window wherein you can get the premium back if you change your mind. However, some applicable charges will be deducted.
- Returns Even on Surrender
If you surrender the ULIP during the lock-in period, the life cover ceases. However, the surrender value is paid back, so you would still get some returns.
- Monitoring NAV
Just like you can monitor a mutual fund’s performance, you can monitor a ULIP’s performance. The daily Net Asset Value (the price at which units of the fund are selling) updates give you an idea of the fund performance.
- ULIP Tax Benefits
ULIPs have several tax-saving benefits. Some significant ULIP tax benefits are:
- ULIP premiums are eligible for tax deduction under Section 80C of the IT Act up to the Rs 1.5 lakh limit, based on your tax slab.
- The policy returns on maturity are also exempt from being taxed under Sec 10D of the IT Act. But, if the aggregate premium exceeds Rs 2.5 lakh, it will be taxed on a capital asset basis.
- There is no tax on partial withdrawal after the lock-in period if you take out less than 20% of the fund value.
- During the unfortunate event of death, the sum assured of the life cover or the total fund value (as may be) will be paid out, exempt from tax. This significant ULIP tax benefit allows the bereaved family to retain their financial goals and stability.
- Top-ups of the ULIP are also eligible for deductions up to Rs 1.5 lakh under Section 80C.
- ULIPs are exempt from paying long-term capital gain taxes. Normally, ELSS investments are taxable if the profits exceed Rs 1 lakh. However, investing in equity via a ULIP gives an exemption.
ULIPs can help you plan for your goals while balancing your responsibilities. Research and identify what is the right ULIP policy for your goals and future vision. You should also be clear about the charges to be paid if you opt out, what your specific ULIP tax benefits and liabilities could be, etc.