Whether you dream of owning your own home or sending your kids to study at the most prestigious universities in the world, saving for and investing in your future life goals should begin in the present. However, embarking on this investment journey may be a little challenging for a beginner. One of the preferred course of action in such circumstances is to consider opting for a ULIP or Unit Linked Insurance Plan that provides you with opportunities for market-linked wealth generation –as per your life goals and risk appetite- to efficiently fulfil your life goals.
What’s a ULIP?
Before moving on to see the benefits of a ULIP, let’s understand how this plan works. A ULIP is a plan that combines insurance and investment benefits into one comprehensive insurance product. Thus, while you get to secure the financial future of your loved ones with the policy’s life cover, you also get to diversify your investment portfolio by investing in equity, debt, mix of both and other market-linked funds.
Short-term Benefits of ULIP
While ULIPs are generally hailed as one of the preferred long-term insurance-cum-investment plans, they also come with a set of short-term benefits. Some of these short-term benefits have been listed below:
Creating a Savings Habit
Savings is the first step to building an investment portfolio. Without cultivating a savings habit, you cannot hope to make the most of wealth creation opportunities. Since ULIPs come with a minimum 5-year lock-in period, they help you hone a savings habit even in the short term. Even in this short-term period, the money that you’ve invested in the unit-linked plan earns market-linked returns. Thus, such plans help promote a savings culture, while simultaneously augmenting your wealth.
Investment Opportunities plus Insurance Covers
Your sudden demise may put your family in emotional and financial jeopardy. However, by investing in a ULIP, you may help prevent the latter. Since ULIPs are dual-benefit policies that offer both life insurance covers as well as market-linked wealth creation opportunities to the policyholder. So if something untoward were to happen to you today, your dependents would receive the death benefit payout from the policy as per the policy terms & conditions. This may allow them to pay their school and college tuition, meet their day-to-day expenses, clear debts, etc.
Switching Funds as per the Market
Since market fluctuations in the short run are quite common and frequent it is important to have control over your investments. That is why an investment plan like ULIP is prudent. With such plans, you get to move your funds freely as per the changes in the market and changes in your life goals.
Long-Term Market-Linked Wealth Creation with ULIP
While ULIPs have short-term benefits, the real opportunities of such plans are realised in the long run. Here’s a look at some of the long-term benefits of these plans:
Among the various types of investment plans in India, ULIPs are one of the most popular options, because of the investment flexibility they offer to the policyholder. As per your risk appetite, with a ULIP, you may choose to invest in debt or equity funds or mix of both. Market-linked returns from equity investments prove to be better in the long run.
Moreover, markets in the short term may be quite volatile. This may lead to losses. However, with a long-term ULIP, you may be able to balance out your losses because of rupee cost averaging. This is because you can buy more fund units when the market is low and lesser units when the market is high, thereby balancing out your long-term investment costs.
Compounding benefits are quite crucial in market-linked wealth generation. Essentially, compounding implies the exponential growth of your investment. To put it in simpler terms, the money that you invest through ULIPs, may earn returns. When these returns accumulate, they may be reinvested, accruing exponential returns to the policyholder.
In the long run, ULIP proves to be one of the preferred investment plan because of its compounding interest feature that ensures “the returns on your principal investment earn returns”. Thus, if long-term market-linked wealth creation is your goal, ULIP may be one of the prudent routes to achieve this goal.
Aligning Your Life Goals with Your Investment Plans
Given that your risk appetite is bound to change with time, ULIPs prove to be one of the preferred investment plans in the long run. With ULIP, you can correlate your updated life goals with your fund allocation plan to effectively navigate the risky markets. However, since this requires a thorough analysis of the market’s ebbs and flows, you may only reap this benefit in the long run.
ULIPs offer tax benefits to the policyholder. The premiums that you pay for the plan are allowed as a deduction against taxable income under section 80(C) of the Income Tax Act, 1961 as per provisions stated in the Act. Further, the amount that you receive upon maturity is also exempted from tax subject to satisfaction of the conditions specified under Section 10(10D) of the Income Tax Act.
A point to be noted here is that for policies issued on or after 1 February, 2021, if the premium you pay in a policy year exceeds ₹2.5 lakhs, the maturity amount will be treated as long-term capital gains and would be taxed as per the regulations stipulated in the Union Budget 2021.
Wrapping It Up
If you’re looking for a streamlined route to help you achieve your long and short-term goals, ULIP may be your answer. With the flexibility and long-term returns associated with such plans, investing in them is a prudent choice. Additionally, such dual benefit plans also come with a life cover that protects the financial future of your family in your absence. Thus, you get to enjoy market-linked wealth creation opportunities and a comprehensive life cover when you opt for ULIP.