A Unit Linked Insurance Plan (ULIP) offers various benefits such as –
- Provides insurance coverage during the policy tenure
- Helps you earn market-linked returns on your investments
- Provides you with tax benefits on your investments, as per applicable tax laws
Given these benefits, many people buy ULIPs as a part of their financial planning. However, when is the right time to buy?
When should you consider buying a ULIP?
The right time depends on your financial goals and needs.
That being said, if you want to buy ULIPs for your future goals, the earlier you buy, the longer you get, to build and grow your funds. Buying a ULIP early in life has multiple benefits. Here are some of them –
1. Coverage against unfortunate event of death
ULIP offers coverage against life’s uncertainties. The plan covers the risk of unfortunate death, thus giving you a sense of financial security in case of any uncertainty.
2. The Power of Compounding
One of the other reasons people invest in ULIPs is to earn market-linked returns, as per their risk appetite. When it comes to earning good returns, it helps if you give your investments some time to grow.
When you buy ULIPs, you should preferably opt for a longer-term horizon. You may be able to accumulate better returns over a long-term period and build up a good corpus to secure your future goals.
Let’s understand with an example. Two friends, 30 year old Rahul and 35 year old Sanjay wants to invest in a ULIP plan to buy a house when they are 45 years old respectively.
Consider the following two scenarios to check out what the expected corpus would be at 8%^ and 4%^ rate of return if they invest in the Bajaj Allianz Life Smart Wealth Goal III – A Unit-linked Non-Participating Individual Life Savings Insurance Plan~ –
| Scenario 1 | Scenario 2 | |
| Objective of buying the ULIP | Saving for the down payment of a house | |
| Age at which you buy the plan | 30 years, male | 35 years, male |
| Age at which you need the corpus | 45 years | 45 years |
| Policy tenure | 15 years | 10 years |
| Premium paying term | 15 years | 10 years |
| Investment amount | Rs.60,000 in the annual mode | Rs.60,000 in the annual mode |
| Sum Assured | Rs. 6,00,000 | Rs. 6,00,000 |
| Assumed rate of return | A. 8% per annum B. 4% per annum | A. 8% per annum B. 4% per annum |
| Expected corpus on maturity | A. Rs.15.18 lakhs B. Rs. 10.92 lakhs | A. Rs.8.44 lakhs B. Rs. 6.78 lakhs |
Basis aforementioned example, you can see that if you delay buying the ULIP by just 5 years, the difference in the corpus can be significant. The longer you stay invested, the better can be the corpus you accumulate, which however, is subject to market fluctuations.
3. To Save Affordably for Your Goals
While compounding helps your corpus to grow with time, it may also reduce the investment amount needed to accumulate the desired corpus over the long haul. In other words, if you have a long-term investment horizon, you can save in smaller amounts and still build up the desired corpus.
This is more like a reverse of the aforementioned calculation wherein you know the corpus, and you work out the savings required to reach the same. The longer time you have in your hands, lower might be the investment amount needed.
Here are another two scenarios to understand wherein two friends, 30-year-old Rahul and 35-year-old Sanjay want to invest in Bajaj Allianz Life Smart Wealth Goal III – A Unit-linked Non-Participating Life Savings Insurance Plan~, choosing the Wealth Option with Wheel of Life Portfolio Strategy- II to buy a house when they are 45 years old respectively. So, they need a corpus of Rs 25 lakhs when they are 45 years old%.
| Scenario 1 | Scenario 2 | |
| Objective of buying the ULIP | Saving for the down payment of a house. | Saving for the down payment of a house. |
| Corpus needed | Rs.25 lakhs | Rs.25 lakhs |
| Age at which you buy the plan | 30 years, male | 35 years, male |
| Age at which you need the corpus | 45 years | 45 years |
| Policy tenure | 15 years | 10 years |
| Premium paying term | 15 years | 10 years |
| Assumed rate of return | A. 8% per annum^ B. 4% per annum^ | A. 8% per annum B. 4% per annum |
| Type of investment | Wealth Option with Wheel of Life Portfolio Strategy- II5 | Wealth Option in the Wheel of Life Portfolio Strategy- II5 |
| Expected premium needed every year | Rs.1,00,000 | Rs.1,80,000 |
| Sum Assured | Rs. 10,00,000 | Rs. 18,00,000 |
| Expected Fund Value | A. Rs. 25,31,414 B. Rs. 18,20,448 | A. Rs. 25,32,028 B. Rs. 20,36,405 |
4. For the Inherent Tax Benefits
Lastly, the tax angle also makes buying early a better choice. You can utilise the tax benefit of ULIPs to your advantage. Here’s how –
- The annual premium paid for the ULIP allows tax savings under Section 80C of the Income Tax Act, 1961. You can claim tax benefits for premium up to Rs.1.5 lakhs, up to 10% of the sum assured2.
- If you switch between the investment funds, the switching is tax-free3.
- Death benefit is tax-free under section 10 (10D) of the Act3.
- The maturity benefit is tax-free under Section 10(10D) if the annual premium is up to Rs.2.5 lakhs4.
- For the policies issued on or after 1 Feb 2020 with annual premium in aggregate of Rs. 2.50 lakhs, gain from such policy will be taxable as Capital Gain in the hands of recipient. Such gain will be treated as equity oriented or debt oriented gain basis the underlying assets held under ULIP policy.
These benefits show how buying early can work in your favour. So, assess your financial needs as well as your risk profile and consider buying a suitable Unit Linked Insurance Plan.
Reference
1. https://www.bajajallianzlife.com/life-insurance-guide/ulip/ulip-tax-benefits.html
2. https://cleartax.in/s/80c-80-deductions
3. https://www.tomorrowmakers.com/other-investments/taxability-ulips-understanding-new-norms-article
4. https://cleartax.in/s/unit-linked-insurance-plan-taxation-rules
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