Understanding the Benefits of ULIPs

When thinking about life insurance products, a common option that you may come across is ULIPs. Typically, it is understood that they offer the dual benefit of insurance coverage combined with investment opportunities. A key advantage of ULIPs pertains to how your hard earned money grows due to the power of compounding, not only in terms of the principal but also on account of the returns generated. Let us dig in a little deeper and see for ourselves if ULIPs can really work well for you. 

Is ULIP a Good Investment?

A Unit Linked Insurance Plan, ULIP, is a financial product that is made up of two main components, life insurance and investment. The premium that you pay gets divided into these two sections, where one part is collected as the life insurance payout while the other is invested in the market. Because ULIPs offer protection, they offer the advantage of tax saving as well. Flexibility is another notable feature of staying invested in ULIPs. Compared to traditional policies, ULIPs gives individuals the flexibility to switch between different funds on the basis of market conditions and of course, their own risk appetite.

What are the Benefits of ULIPs?

Simply put, ULIPs offer triple benefits. Now let us discuss these three components.

1. Insurance:
   The life insurance cover allows you to safeguard your family’s future against an unfortunate incident. For every individual, a basic financial objective is to ensure that one’s family would not have to face a financial crunch in the wake of unexpected developments or tragedies.

2. Investments:
   You have the option to choose the fund of your choice as per your asset allocation and risk profile and the fund managers invest the same on your behalf based on the fund’s objective.
   
   Depending on the market trends and your appetite for risk you have the option to switch between funds. As ULIPs come with a lock-in period of 5 years, they are more suited for long-term goals.

3. Tax Savings:
   There are 3 exclusive tax benefits that ULIPs provide.

   1. The premium paid up to ₹1.5 lakhs per annum is tax-free under section 80C, just like other insurance plans as well.

   2. The maturity benefit, i.e. the fund value is also tax-free under section 10(10D) provided the annualised premium is less than INR 2.5 lakhs and the sum assured is at least 10 times the premium amount.

   3. There is no capital gains taxation in any of the switches from equity to debt or vice versa. This feature is unique to ULIPs and is not available in any other investment product in India. 

Are ULIPs really the best investment option?

From a financial viewpoint, it is no secret that there is no guarantee pertaining to any “best” ULIPs. A key factor to consider is that when staying invested for a longer period of time, ULIPs can serve as a long term wealth creation tool. The power of compounding enables ULIPs to generate substantial returns over time. Further, it serves as an excellent tool for retirement planning in advance and for your present financial situation as well.

Following a five-year lock-in period, policyholders have the option to withdraw a certain amount from their Ulips’ funds. Most importantly, these are tax-free but it cannot exceed 20 percent of the fund value.

The benefit under section 80C of Income Tax Act enables individuals to avail tax deductions for premiums paid towards ULIPs, with a maximum limit up to ₹1.5 lakh annually. Further, if you want market-linked investment along with insurance coverage and can make the most of tax-free switches, it is a good product to have in your investment portfolio! 

The final decision totally depends on your financial goals and your risk appetite. 

Therefore, it helps to study the terms and conditions, understand potential risks linked with ULIPs before investing and try to maintain a balanced mix of different investment options as part of your long-term wealth-creation strategy. 

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