It is that time of the year again when most of you get your appraisal letters, listing out your annual increment and bonus. This means you will have a higher income this year and an additional cash flow at your disposal. While you may be tempted to spend the additional money, it would be prudent to consider how you can invest your increased income to meet your life goals. One of the ways to utilize your increment is to invest in Unit Linked Insurance Plan (ULIP) that will help to grow your hard earned salary.
ULIPs are known to provide market linked returns along with protection and tax benefits, and here’s why you should consider starting one.
Enjoy life cover and investment under one plan
While a ULIP may be considered as yet another life insurance product, a ULIP policy also gives investors the benefit of investing in market linked funds along with insurance cover. This means that while you do have the life insurance cover of a policy, you can also invest in a number of market-linked funds such as equity, bonds, and debts, amongst others.
As per section 80C of the Income Tax Act 1961, you are eligible to get tax deductions for up to ` 1.5 lacs in premiums paid towards ULIP, subject to provisions stated therein. Additionally, the amount you receive on maturity is tax exempt under Section 10(10D) of the income Tax Act 1961. Even the long term capital gains (LTCG) tax is not applicable to ULIPs. It also allows customers the flexibility to switch between equity, debt and cash-oriented funds, without attracting any tax. These tax benefits make ULIPs one of the lucrative investment option to invest your increased salary into.
Choose funds as per your financial goals and investment horizon
As per the basic structure of a ULIP, there are various types of funds that investors can choose from before investing. These include equity funds (highest risk factor), income /bonds (medium risk), cash funds (low risk) and asset allocation (high risk). You can invest your money as per your risk-appetite and goals. Investors who have a relatively long time horizon to meet their financial goals can invest in a combination of high risk and medium risk ULIP funds.
Flexibility due to fund switching
Flexibility is always cited as one of the prime benefits of investing in ULIP funds. ULIPs offer investors the opportunity to seamlessly switch between debt and equity funds depending on your knowledge of how the market is performing and your risk appetite. Due to this flexibility of ULIPs, investors may switch to equity funds during a bullish period in the market to optimise their returns and switch back to a debt fund once the market enters a bearish period. This allows investors to take advantage of market conditions and fulfil personal goals despite any fluctuations in the market. Additionally, an individual's risk appetite also changes during the course of their investment lifecycle and they can take advantage of the same due to the fund-switching option of ULIPs to garner the expected returns.
One of the key factors we consider when assessing whether or not an investment option will help us attain our life goals is its ability to aid long term investment. ULIP plans with their five-year lock-in period inculcate a habit of long term investment amongst investors. As ULIPs enable long-term investments, the impact of market fluctuations and uncertainties on the investments are relatively lower.