What are ULIPs?
ULIPs are a type of life insurance policy that invests your premiums in market-linked funds. This helps you grow your premiums based on market movement. Moreover, as life insurance plans, ULIPs also provide financial protection in the case of death within the chosen policy term. This helps add a layer of financial security to your wealth creation goal. Let’s delve deeper into the basic concept of ULIP for wealth creation.
How do ULIPs work?
ULIPs have different types of funds which include equity funds, debt funds, and hybrid funds. You can choose a fund based on your investment strategy and risk appetite. You can also change between the chosen funds if your investment strategy changes and you want to manage your investments basis the changing market dynamics.
ULIP premiums that you pay is invested in the selected fund after deducting applicable charges. Then, the fund value moves basis market movements.
In the case of death during the policy tenure, a higher of the sum assured or the fund value is usually paid as the death benefit, and the policy is terminated. However, if you survive the policy tenure, you get the fund value as the maturity benefit which you can use for your financial goals. This is a part of the entire process of wealth creation with ULIPs.
How do ULIPs help in wealth creation?
Here are some ways in which you can use a ULIP for wealth creation –
Market-linked returns
Firstly, ULIPs offer returns linked to the performance of the financial markets. If you invest in equity-oriented funds, you can get a good return potential. Though equity markets have a high-risk profile, if you stay invested over a long tenure, the volatility risks reduce, and you can get good returns on investment.
Even in the case of debt-oriented funds, your returns would be linked to the performance of the debt market.
The markets perform depending on the economic scenario, future prospects, and inflation. Since the returns are linked to the market, they are inflation-adjusted, too. This helps you create a corpus that offers real value in terms of inflation, and this is how ULIP for wealth creation works.
Different funds for different preferences
As mentioned earlier, ULIPs offer different types of funds. This makes them suitable for all types of investors and also for changing investment preferences. You can invest in equity funds if you have a good risk tolerance level and benefit from the return potential. On the other hand, if you prefer stable returns, you can choose debt funds and grow your wealth with low risks.
There are also hybrid funds that offer a mix of equity and debt, giving you the best of both worlds. These funds balance equity risks with debt exposure and have a moderate risk-return profile.
Switching to changing investment preferences
The market is dynamic and changes constantly. Even your investment preferences might change over time. In either of these scenarios, ULIPs offer a switching facility wherein you can change the chosen funds. For instance, if you have invested in debt funds and the equity markets are performing well, you can switch to equity funds for added returns. Similarly, if you have invested in equity funds and the equity market turns volatile, you can switch your investments to debt funds to protect the returns.
Funds Switching is available under all ULIPs and gives you complete flexibility to manage your money and create wealth.
Readymade investment strategies
Many ULIPs offer investment strategies suitable for individuals with limited knowledge of the financial markets. You can choose from different strategies and create a investment portfolio for your funds.
Tax benefits
Lastly, ULIPs offer attractive tax-saving benefits which add to your wealth creation goal. Here are the tax benefits that you can claim –
Premiums paid for ULIPs qualify as a tax deduction under Section 80C up to ₹1.5 lakhs under old tax regime. Premiums up to 10% of the sum assured (for policies issued on or after 1st April 2012) or 20% of the sum assured (for policies issued on or before 31st March 2012) are allowed as a deduction.
If you suffer from any disability or disease as specified under Section 80DDB or Section 80U, premiums up to 15% of the sum assured (for policies issued on or after 1st April 2013) are allowed as a deduction under old tax regime1 .
Switching is completely tax-free2, and there is no income tax implication.
The death benefit received is completely tax-free3 in the hands of the nominee.
The maturity benefit received is also tax-free under Section 10(10D) in the following instances –
For policies issued before 1st February 2021, the maturity benefit is tax-free under Section 10(10D)4subject to satisfaction of Section 10(10D) conditions.
For policies issued on or after 1st February 2021, the maturity benefit is tax-free for premiums up to ₹2.5 lakhs4 subject to satisfaction of Section 10(10D) conditions. If the premiums exceed this limit, the gains would be taxed as follows –
Gains from units of high value ULIPs (whether equity/ debt oriented), would be taxed as Capital Gains at the rate of 12.5%. Policyholders shall be eligible for an exemption of its capital gains from high value ULIPs upto an amount of Rs 1.25 lakh as per Section 112A of the Act, subject to the satisfaction of conditions therein.
Tips on how to create wealth with ULIPs
Now that you know why ULIPs for wealth creation make sense, let’s understand how to maximise the benefits. The following tips can help in wealth creation with ULIPs –
Choose a premium that will be sufficient to create the corpus needed for your financial goals. ULIP calculators can help you find the right premium for wealth creation.
Choose a longer policy term to stay invested and benefit from the power of compounding.
ULIPs allow partial withdrawals, which can be good for liquidity. However, it is better to avoid partial withdrawals to allow your fund value to grow.
Utilise the tax benefits of ULIPs to save taxes and enhance your disposable income for higher savings.
Many ULIPs allow the top-up facility for added investments. If you have surplus funds, top-up your fund value to save more.
Use switching so that your fund value grows despite changing market dynamics.
Create wealth for your financial goals and also enjoy insurance protection with ULIPs. Unlock the benefits of the policy and create a corpus for your and your family’s needs. Choose from the different types of ULIPs based on your needs and create earmarked funds for specific goals.
FAQs
What is the meaning of wealth creation?
Wealth creation means investing in and creating assets that can generate returns which would, in turn, build up your net worth over time. In other words, wealth creation means saving and growing your savings over time.
How can ULIPs help with wealth creation?
ULIPs are market-linked insurance plans that can help you earn market-linked and inflation-adjusted returns on your premiums. This makes them a suitable choice for wealth creation.
What are the benefits of ULIPs?
Some of the benefits of ULIPs include the following -
They give insurance protection along with wealth creation
They have tax benefits that help in lowering your tax outgo and increasing your disposable income
You can choose the premium amount, policy tenure, premium payment term and frequency, and the market-linked investment funds
You can also make partial withdrawals, switch between the investment funds, redirect future premiums, or pay additional premiums through top-up subject to policy terms & conditions
There are different types of ULIPs that can help with different financial goals
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