7 Advantages of Investing in ULIPs Over Savings Plans

What is a ULIP?

A Unit Linked Insurance Plan (ULIP) is an investment vehicle that combines the aspects of both insurance and investment. A ULIP investment plan offers you protection through a life insurance cover and gives you the ability to create long-term market linked wealth. One of the primary advantages of a ULIP plan is that it offers complete freedom of choice to the investors. In fact, you can choose to invest in either equity funds, debt funds, or a combination of both.

What is a savings plan?

Now that you know the answer to the question " What is ULIP?" let us look at what a savings plan is.

A savings plan is essentially a traditional life insurance plan with endowment benefits. Such a plan gives you the dual benefit of an insurance protection cover and savings. There are two primary types of savings plan - participating and non-participating. A participating saving plan offers several benefits like bonuses, whereas a non-participating savings plan only offers guaranteed returns without any additional benefit like bonuses.

Advantages of Investing in ULIPs

When you invest in ULIPs, you're essentially putting your money into a plan that serves two purposes: it gives ife insurance as well as helps you build wealth through market-linked funds.

Let us look at some more advantages of ULIPs–

1. High return generating potential

   With ULIPs, you get to invest in either equity funds, debt funds, or a combination of both. This allows the plan to generate market-linked returns over the long-term horizon. With ULIPs, you can also make use of the power of compounding, which can help enhance your returns even further.

   
   

2. Can be customized according to your risk tolerance

   ULIPs offer you the ability to customize the investment in accordance with your risk taking potential. For instance, if you are a risk aggressive investor, you could choose to invest in equity funds. Alternatively, if you are averse to risk, you could choose to invest in debt funds. Alternatively, if you are an investor who is okay with moderate levels of risk, you could choose to invest in a combination of both equity and debt funds.

   
   

3. Fund switching ability

   The ability to switch funds is a major advantage that a ULIP insurance plan. Your risk taking potential is something that tends to change as the years go by. You might be okay with taking risk when you are young, whereas you might want to change over to more stable options with lower risk as you age. With ULIPs, you have the power to do so. The fund switching ability of a ULIP allows you to change your investment funds from equity to debt and vice versa.

   
   

4. Top-up facility

   A ULIP allows you to invest an additional amount over and above your existing premium payments. This ability to top-up your initial investment with a subsequent investment is an advantage of ULIP. The top-up facility of ULIPs allows you to put surplus cash to good use instead of just letting it stay idle.

   
   

5. Rupee cost averaging

   In addition to allowing you to use the power of compounding, ULIPs also provide you the benefit of rupee cost averaging. When you invest a fixed sum of money regularly in a ULIP for a long period, your cost of investment tends to be averaged out. This is what is known as rupee cost averaging. For instance, when the NAV rises, you purchase fewer units and when the NAV falls, you accumulate more units. When this is done for a long enough period, the cost of investment averages out.

   
   

6. Ability to beat inflation

   With inflation rates on a constant rise, the value of money tends to go down. However, by investing in a ULIP, you get to earn market-linked returns that may be able to counter the inflation rates, thereby enabling you to successfully combat it.

   
   

7. Tax benefits

   Premiums up to Rs. 1.5 lakh in a financial year as well as the maturity benefits received under both ULIPs and savings plans are exempt under section 80C and section 10(10D) of the Income Tax Act, 1961 subject to provisions stated therein. That said, in addition to the two tax benefits mentioned above, ULIPs also provide you with a third one,–i.e. exemption from Long Term Capital Gains (LTCG) tax. In fact, ULIPs is one such investment options that is completely exempt from LTCG taxation.

   
   

ULIP vs Savings Plan: Differences

Is ULIP the Right Choice for You?

A ULIP plan is a suitable choice if you're looking to balance financial protection and get the potential to grow your wealth . If you want the flexibility to grow your wealth while securing your family's financial future, a ULIP can be a smart, goal-oriented choice .

Conclusion

With so many benefits and advantages on offer, ULIPs are one of the preferred investment options. If you are an investor who is looking for a life protection cover and market-linked returns in the long-term, ULIP investments are the way to go.

FAQs

1. Do ULIPs yield higher returns than savings plans?

   ULIPs invest in market-linked funds , this means that the returns are subject to market performance .Conversely, savings plans provide fixed returns. The decision is based on how comfortable you are with changes in the market.

   
   

2. Are ULIPs more tax-efficient than savings plans?

   Subject to certain restrictions, both ULIPs and savings plans offer a tax-free maturity under Section 10(10D) and are eligible for tax deductions under Section 80C, applicable under the old tax regime.

   
   

3. Are ULIPs riskier than savings plans?

   ULIP funds are linked to the market and their returns depend on how the funds perform. Savings plans provide guaranteed* benefits, making them better suited for risk-averse individuals.

   
   

4. Do ULIPs offer life cover benefits that savings plans don't?

   Both ULIP plans and savings plans have life cover benefits.