Benefits of Investing in ULIPs for the Long Term
When you invest in a ULIP plan, the insurer provides you with a variety of fund options. After investing, you get fund units depending on the fund you opt for. ULIPs provide an option to choose between equity, 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 can generate good ULIP returns over the long term and help in minimising the effects of inflation. However, if you are wondering whether “are ULIPs good for the long term”, then you need to know the benefits of investing in unit-linked plans.
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. Several factors make ULIPs good for long-term investment options. They are as follows –
Disciplined savings
After certain regulatory changes in the past, ULIP plans 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 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 the provisions of the 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 conditions. 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 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 returns on 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 three stages of the policy course:
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.
Maturity of the policy
In case the policyholder survives the policy term, the payout 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.
Partial withdrawal
Partial withdrawal is also exempted from tax, subject to the satisfaction of conditions mentioned in Section 10(10D) of the Income Tax Act, 1961.
Why ULIPs Make Sense for Long-Term Investment?
Let’s understand why ULIP is good for the long term.
ULIPs are life insurance plans with an element of investment in the same. When you pay the premium, a part of it is used to cover the cost of providing life insurance coverage. The other part is used to invest in market-linked funds.
ULIPs allocate your premiums to funds which consist of securities that are traded on the market. Such securities do not offer guaranteed returns; hence, under ULIPs, the returns are not guaranteed*. The returns depend on market movements, and the market is prone to various types of risks.
When you invest for the short term, short-term market fluctuations may yield negative returns on your premiums. On the other hand, when you have a long-term horizon, you can avoid the panic that comes with short-term volatility. Over time, if markets stabilise and may yield good returns.
Moreover, compounding of returns can grow your fund value considerably if you give it time. This is possible only when you have a long-term investment horizon.
ULIPs vs Other Long-Term Investment Options
Besides ULIP plans, there are other investment avenues too that are available for a long-term investment horizon. Here’s a comparative analysis between ULIPs and other long-term investment options –
| ULIPs | Other long-term investment options |
|---|
Provide the dual benefits of insurance protection and market-linked returns
| Usually provides only the benefit of returns. Insurance coverage is not available unless you choose endowment or money-back plans
|
Returns depend on market movements
| Some options offer fixed returns, while some offer returns linked to the market
|
Some types of ULIPs offer whole-life coverage and run up to 99 or 100 years of age
| Whole life coverage can be found in endowment or money back plans. However, other investment options, like FDs, mutual funds, etc. might not offer whole life protection
|
Lock-in period of 5 years
| Some options might have a lock-in period longer than 5 years, while some might have shorter options too
|
Tax benefits on the premiums paid, death benefit and maturity benefit
| Tax benefits depend on the type of investment selected. For instance, life insurance savings plans, like endowment and money back, offer tax benefits on premiums paid and policy benefits. However, if you choose fixed deposits or mutual funds, the tax benefit will depend on the type of deposit or fund selected.
|
Flexibility of switching, partial withdrawals, top-ups, etc.
| Such flexibility depends on the investment option selected. For instance, fixed deposits do not allow liquidity. If you withdraw prematurely, you might incur a penalty. However, mutual funds allow easy liquidity but withdrawing from them fund might attract taxation.
|
Conclusion
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 fit the bill. With the dual benefit of insurance and investment, ULIPs cater to a wide variety of investors. So, choose ULIPs for their benefits, have a long-term horizon and save up for the major financial milestones of life effectively.
Key takeaways
- ULIPs offer the dual benefits of insurance protection and market-linked returns on the premiums paid.
- ULIPs are good for the long term as they can help you create a corpus for your financial goals.
- It is better to choose a long-term investment horizon to wait out market volatilities and to give your corpus the time to grow with compounding.
- ULIPs offer tax benefits on the premiums paid and the policy benefits received, allowing you to create a tax-efficient corpus for your goals.
- ULIPs also offer other flexible features like fund switching, partial withdrawals after a 5-year lock-in period, top-up premiums for additional premium payments, etc.
FAQs
Are ULIPs better than mutual funds for long-term goals?
Both ULIPs and mutual funds are quite different from one another. While ULIPs have an inbuilt life insurance coverage, mutual funds do not. So, you should understand how these products work and choose one that matches your financial needs. .
What happens after 10 or 15 years of ULIP investment?
Your fund value moves according to market movements. Depending on the types of ULIP funds you have selected, your fund value may grow with the benefit of compounding and positive market movements. This would create a good corpus for your financial goals.
Can I change my fund allocation midway in ULIP?
Yes, ULIPs allow the benefit of switching, wherein you can change your fund allocation at your discretion anytime during the policy tenure.
How do ULIPs perform in volatile markets over the long term?
Market volatility is usually short-term. Over longer tenures, the market stabilises and grows. With ULIPs, if you choose equity funds, you can enjoy good returns even in volatile markets if you have a long-term horizon.
