Are ULIPs Good As A Long-Term Investment?
When one hears about unit-linked insurance plans, the first question that comes to the mind is this-
Are ULIPs good for the long term?
Yes, ULIP plans are one of the preferred investment options for the long term. ULIPs are a financial tool that helps you enjoy the protection of an insurance cover and simultaneously provide investment opportunities. If you dream of owning a house in 15 years or going on a world tour after retirement, ULIP investment is the ideal option for you. Though ULIP is an insurance product, it provides all the benefits of an ideal investment product like tax savings and market-linked returns.
When you invest in a ULIP, the insurer provides you with a variety of fund options. After investing, the policyholder is allocated fund units depending on the fund he/she opts for. ULIPs provide an option to choose between equity or debt funds or a combination of both. Risk-averse investors can opt for debt funds, while people seeking higher returns can opt for equity funds. Both investment options lead to substantial ULIP returns over the long term and help in minimising the effects of inflation. One of the major ULIP benefits is the flexibility to switch between funds as per the market conditions. It is important to have a long-term view while investing in ULIPs. A number of factors make ULIPs one of the preferred long-term investment options –
• Disciplined savings
After certain regulatory changes in the past, ULIPs have a minimum lock-in period of five years, which inculcates a sense of discipline in investors. Depending on the premium payment term of the policy and the premium payment frequency chosen, one has to pay his/her premium on a monthly, quarterly, half-yearly or on an annual basis. ULIP premiums are a form of regular savings. Gradually, it develops a habit of saving rather than spending. Disciplined investing over a period of time leads to a substantial accumulation of wealth.
• Market-linked returns
ULIP investors are provided with an option to choose from a host of equity or debt funds. Investors can also opt for a combination of equity and debt funds depending on their risk profile and return expectation. Investors seeking to build a large corpus can choose to invest exclusively in an equity fund. Equity investments are known to generate considerable returns over the long term, which helps in negating the effects of inflation. Investing in equity funds through ULIPs with a long-term horizon also solves a key issue. It averages out the impact of short-term market movements on the value of the investment. When the market is down, your investments will fetch a higher number of units and when the market is at its peak, the same investment will buy a lower number of fund units. Over time, the cost of all the units averages out, giving consistent returns. ULIP returns are exempt from the long-term capital gains tax, essentially boosting the overall returns for the investor. Tax benefits are subject to provisions of Income Tax Act, 1961, as amended from time to time.
• Flexibility to modify allotment
Investing is not a linear process. The strategy has to be modified according to the life goal and the market condition. A crucial ULIP benefit is the feature that allows switching between funds. Investors can choose to transfer their units from one fund to another. Switching between funds allows investors to align their portfolio with their life goals and mitigate risks emanating from market movements. For instance, if your life goal is over a decade away, you can invest in equity funds, gain from higher market returns in the initial phase, and later transfer the investment into a debt fund. Similarly, if you think equity markets are going to be in a turmoil for a period due to a particular global event, you can shift your units to a debt fund for safety.
• Power of compounding
The power of compounding is the reason for the success of a number of famous investors. Compounding is simply the process of earning return over the interest earned on the initial investment. When your money starts earning money it is known as compounding. The actual magic of compounding can only be seen after you remain invested for a long period. As the returns accumulate and become the principal amount, the overall returns grow exponentially in the later years of the investment. One should stay invested in ULIPs for the long term to achieve important financial goals.
• Tax Benefits
ULIP benefits also extend into the tax-saving territory. Popularly referred to as EEE (exempt-exempt-exempt) investments, ULIP offers tax benefits at all the three stages of the policy course:
1. Death of the policyholder
Death benefit paid to the nominee after the death of the policyholder is tax-exempt, as per Section 10(10D) of the Income Tax Act, 1961, subject to provisions stated therein.
2. Maturity of the policy
In case the policyholder survives the policy term, the pay-out received upon maturity of the ULIP plan is also exempted from tax, subject to satisfaction of conditions mentioned under Section 10(10D) of the Income Tax Act, 1961.
3. Partial withdrawal
Partial withdrawal is also exempted from tax, subject to satisfaction of conditions mentioned in Section 10(10D) of the Income Tax Act, 1961.
If the returns are good and the investment is tax-efficient, it can be considered suitable for the long term. ULIPs with market-linked returns, tax savings and adequate flexibility are one of the preferred investment options for the long term. With the dual benefit of insurance and investment, ULIPs cater to a wide variety of investors. If you have life goals like buying a house or funding children’s education, you may choose to invest in a ULIP and enjoy a stress-free life.
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