There are several types of life insurance you can choose from to create a security net for your family in your absence. Life insurance acts as an alternate source of income for your family’s financial needs. Also, in case of your sudden demise, you do not want your family to be burdened by your debt. If you have sufficient life cover, they could pay for it easily in your absence. However, traditional life insurance can block enormous sums which directly affect your personal investment. If you hesitate to buy insurance thinking about the money it holds up, you can choose life insurance that offers you a component of investment, too. This is exactly what a Unit Linked Insurance Plan (ULIP) does.
ULIP is a two-in-one financial instrument, where you get life insurance and investment too. When you buy a ULIP, the premiums you pay are partly invested towards life cover and partly invested in funds. You can decide which funds you want to invest based on your risk appetite. ULIP is a great product for creating long-term wealth and having a life cover at the same time.
What factors affect the perception of a ULIP?
When you are investing money in any financial product, it is important to know its components and factors beforehand. It enables you to make an informed decision, so you are not confused or worried later. Here are some factors that influence your ULIP-
Returns on funds from ULIP
ULIPs are directly linked to the market, and the returns depend on how the market is performing. The returns you generate from ULIP depend upon which funds you have invested in. Based on your ability to take risks, you can invest in equity, debt, or balanced funds. They can generate great returns if you invested in the long run with a disciplined approach. ULIP has several benefits that are not a part of a typical investment plan. Instead of blocking your funds in different financial instruments, a ULIP will give you both – life cover and return on investments.
Flexibility
One of the biggest ULIP benefits is its flexibility. Whenever you are building a portfolio, you need to choose investments that offer sufficient liquidity. It ensures that when you urgently need funds, you can simply withdraw money from your investments. A ULIP has a lock-in period of 5 years. However, after the lock-in period, you can avail of partial withdrawal anytime you want. Also, with a ULIP, you inculcate the habit of saving, which is beneficial for your long-term monetary goals.
ULIP charges and fees
Several people are hesitant to invest in ULIP because of the charges involved. Since there are fees both on the insurance end and the investment end of a ULIP. Earlier, when ULIPs were launched, people would find the premiums expensive. However, things have developed today. Insurance companies design ULIPs keeping affordability in mind, so one can purchase a plan with ease. Also, the charges have reduced significantly over the last few years.
Impact on taxes
When you buy a ULIP, you can avail several tax benefits. The money that you pay on your premiums is exempt from taxes under section 80C of the Income Tax Act. Several people choose ULIP to get the tax benefits. Also, when your ULIP matures, the sum that you receive is also exempt from taxes. While most investments are taxable, since ULIPs have an insurance component too, the maturity amount is exempt from taxes under section 10 (10) D of the Income Tax Act.
Market risks associated with ULIP
Many people who prefer traditional investment instruments like Fixed Deposits (FDs) may hesitate to invest in a ULIP policy. They would feel that it is a risky investment. However, a ULIP, though subjected to market risks, allows you to choose and also switch amongst funds. When you buy a ULIP in your 20s, and your ability to take risks is high, you can simply place all your funds in equity. However, as you enter your 30s and establish a family, your risk appetite goes down. Now, you can simply switch the funds to debt instead of equity. Debt funds are a safe investment, as they invest money in corporate and government bonds. One of the biggest ULIP benefits is the option of switching between funds anytime.