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
Now that you are aware of what a ULIP and a savings plan are, let us look at the advantages of ULIP insurance –
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.
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.
