ULIPs are unique insurance products. Along with life cover, they also provide a chance for the policyholder to reap returns by investing in market-related instruments. A ULIP is an efficient option for those who are looking to add an extra element to their insurance policy. For primary earning members of their family, the worry of having to ensure the future of their loved ones is ever-present. While the life cover of a ULIP can relieve this worry off you, the investment option can help gain returns depending on market performance.
However, due to the risks that market-related instruments carry, many may wonder if a ULIP is an expense or an investment. In this article, we tell you why and how ULIPs can be an excellent investment if one takes the right approach.
How do ULIPs work?
Let’s also take a look at the meaning of ULIP plans. The premiums that you pay towards your Unit Linked Insurance Plan are used for two purposes. Mainly, a large portion of the premium goes towards building your life insurance corpus. This is the sum assured that your loved ones will receive if you pass away under unfortunate circumstances. However, there are certain terms and conditions that need to be met to be eligible for the sum assured payout. The insurance company utilises the other portion of the premium to invest in market-linked instruments.
The best part about investing in a ULIP policy is that you get to choose the asset class that your money gets invested in; and, depending on your potential to tolerate risks, you can even transfer your funds from one asset class to another. An estimation of the results that certain asset types may bring in can be ascertained by using the ULIP calculator.
Why ULIPs are an investment rather than an expense
ULIPs provide flexibility to transfer funds
One of the best features of a ULIP is that they provide flexibility to the investor. You may not receive this feature with other investment options. Essentially, what this flexibility feature entails is that you can transfer your funds from, let’s say, equity funds to debt funds if the market is not performing well. If the market has been gaining traction and is doing quite well, then you can get the funds transferred from debt funds to equity funds. This is called fund switching. Most companies provide several free fund switches in a year. This switching allows you to lessen the negative impact of market volatility.
ULIPs make you eligible for tax deductions
If you are the sort of person to make investments after looking at the tax benefits they provide, then a ULIP may be a great option for you. ULIPs come under the regulation of the IRDAI or Insurance and Regulatory Development Authority of India. Thus, a ULIP plan is primarily an insurance product. As per prevalent tax laws, the premium paid towards a ULIP plan is eligible for tax deductions of up to Rs. 1.5 lakhs. The death benefit payout and the maturity benefit payout are exempted from tax as well.
ULIPs help inculcate a long-term investment approach
Experts say that the best returns on the investment are probable when the investor is willing to take the long-term approach and trust in the market for a long duration. Thus, ULIPs seem like a perfect investment. Since they have a lock-in period of five years, the investor is guided to invest a fixed amount regularly. This long-term approach allows your investment to handle market volatility in a better way. A ULIP calculator can also be used to comprehend the duration for which you will have to invest money to reach your goal.
One should know not only know the meaning of a ULIP and its features; they should also research before investing in a ULIP plan. Significant factors to consider are the past trends, track record, credibility of the insurance company, the charges levied, and so on. Though one may try strategies and tactics to maximise the returns on the ULIP, ultimately, the market conditions are the major determinant.
As one can see, the returns, monetarily as well as otherwise, make a ULIP a worthy investment rather than an expense.