ULIP Registration has been booming in the past few years and many people are asking questions like, “Is a ULIP policy worth the hype?” It is unknown whether their popularity was because of the falling stock markets or because they were just a smart investment option. Nobody knows for sure. But those who have made investments in ULIP policies are not complaining. In this article, we will discuss the ULIP plan’s meaning and why it is being taken up by more and more people.
Savings and Investments for the Long Run
In India, the tax-saving season is like an annual ritual. This is the time when you buy a new insurance policy or invest in an ELSS fund. But, if you are looking for a long-term investment plan, ULIP policy can be your best bet. You can start with a short-term plan, say 3 years, and then extend it to 10 or 15 years.
Many people don’t know this but the truth is that ULIPs fulfil your tax-saving need for more than one year. So, even though you had to make a quick decision this year, next year you can simply continue the same plan. However, if you wish to choose another plan, you can do so as well.
But why should ULIPs be your choice? Well, there are several reasons such as:
- It helps you in saving taxes without compromising on returns
- You get liquidity by surrendering your fund and taking out the money after five years of holding it. This is exempted from tax too!
- You can use ULIP policies as collateral for loans due to their high market value and liquidity
- With every premium paid, you have the option of buying additional units at discounted rates
ULIPs are mutual funds with insurance coverage attached to them. So, you not only get the benefit of investing in a diversified portfolio but also get life cover. The cover amount is usually based on the sum assured under the plan. However, unlike traditional plans, ULIP policies are highly customizable. You can change your investment strategy even after you have started investing in the plan.
For example, if you have started investing in a conservative fund option with low-risk exposure and want to switch to aggressive growth options, you can do so. You can also choose from the different accumulation and distribution strategies for better returns. All you need to do is notify your insurer who will help you do this.
Enhanced Life Cover
The life cover is the only benefit that you will receive from a pure term insurance plan. But with ULIP policies, you don’t have to compromise the life cover for the investment benefits. When you invest in a ULIP plan, you get both investment and insurance benefits.
The life cover amount is either equal to or more than the current fund value of your ULIP. This can help secure your family’s financial future even if you are not around to take care of them. Moreover, if you use a ULIP plan to save for your child’s higher education goal, the policy can ensure that your child receives the money as intended even after your demise.
The insurer will pay your family the life cover amount but continue to invest on behalf of your child.
Various Tax Benefits
ULIP policies are one of the best options to invest in as they not only provide you with the dual benefit of investment and insurance but also offer other benefits such as the flexibility to change your fund allocation, get a loan on your ULIP plan, and so on.
If you want to maximize these benefits you must take advantage of all avenues available to you by investing in a ULIP plan. One such opportunity is the fact that ULIP returns are tax-free!
While the tax savings on your investment in ULIP plans are limited to the 80C limits, you can invest any amount in the ULIPs. To ensure that your maturity proceeds do not attract tax all you need to do is invest only up to 10% of the policy sum assured in any policy year.
Policy Reconsideration Features
In case you are buying a ULIP plan without any long-term financial goals, it is always wise to go with a higher sum assured. There are many reasons for the same. First of all, as we know that the sum assured under ULIP investment becomes taxable only if it exceeds 10% of the annual premium paid by you, hence you should always keep an option to increase your investment amount in the future.
This will save you from the efforts of buying a new ULIP plan when your income grows and you want to invest higher sums in your ULIP policy. In addition to this, income growth is highly likely for you especially when you start investing early. Keeping your sum assured high will save you from the efforts of buying a new ULIP plan when your income grows.
For example: If you are 30 years of age and can invest Rs. 1 lakh per annum into ULIP, then you can opt for a sum assured of Rs. 15 lakhs.
A goal-oriented investment is a dream come true for every investor because it ensures he/she has a focused approach towards investing. After all, you can use every tax-saving investment for a specific purpose and that is how you can make them useful again.
ULIPs being a long-term investment commitment may quickly start to bore you into making an irrational decision. This happens only because you may not have had a clear goal in mind except that of saving taxes when you bought the ULIP plan.
If you are planning to buy ULIPs in the future, then start by thinking about what all things matter to you most. Once these goals are set, evaluate their priority levels, along with the time horizon of each goal, and then use this information to create an investment strategy by picking specific funds that are suitable for each goal.
As a final note, ULIP policies are often considered to be quite high-risk by potential buyers as well as by financial analysts, as they can be a tricky and riskier investment option than traditional term policies. Now when you know the ULIP plan meaning, they are worth a look at, and being able to compare these types of insurance plans among insurance providers is key to getting the best plan.