ULIPs were first introduced in India way back in the year 1971 by the Unit Trust of India (UTI). So, what makes it so desirable and popular in the minds of the Indian investors? Continue reading to find out. But before that, what is a ULIP? Let’s quickly revisit the concept.
What is a ULIP?
A Unit-Linked Insurance Plan (ULIP) offers dual benefits of both insurance and investment. Offered by insurance providers, a ULIP requires you to make regular payments to the insurer, known as premiums. In exchange, the insurer provides you with a life cover and invests the premiums that you pay in market-linked funds that you choose at the time of purchase. Depending on your needs and requirements, you can choose either equity funds or debt funds or mix of both.
Reasons why ULIPs are attractive to the Indian Psyche
A Unit-Linked Insurance Plan offers you the ability to create market-linked wealth in the long run and also provides some much needed financial protection to your family if something were to happen to you. While this is a compelling reason for ULIPs to be popular among the Indian investors, it is not the only one. Here’s a quick look at a few of the reasons.
1. They’re one of the preferred instruments for satisfying long-term goals
As you’ve seen above, a ULIP is a long-term investment option. It works well when given enough time. Factors like compounding, which is basically reinvestment of your returns to generate higher returns, play a huge role when it comes to creating market-linked wealth, which a ULIP leverages.
Also, by staying invested for a long period of time, you can lower the effects of market volatility and achieve better and more stable returns. This makes ULIPs the suitable option for satisfying long-term goals such as the purchase of your own home or your child’s marriage.
2. They offer complete freedom of choice
Unit-Linked Insurance Plans are all about customizability and complete freedom of choice. You can not only customize the death benefit sum assured and the tenure out of the available options, but also choose how much to invest and the kind of funds to invest in as well.
For instance, if you’re a young investor with a high penchant for risk, you can choose to invest in equity funds. On the other hand, if you’re an older investor with a low-risk appetite, you may choose to invest in debt funds instead. You can also use a ULIP calculator to help you make investment decisions as well.
3. They allow switching of funds
Another major reason why ULIPs are popular amongst Indian investors has to do with the fact that you can switch funds at any point during the tenure of the plan. Let’s say that you chose to invest in equity funds at the time of purchase of the plan.
After a few years, if your risk appetite changes or the market underperforms, you can simply choose to switch over to debt funds. And if at any point you wish to go back to equity funds, you can simply make a request for switching from debt to equity once again.
4. They come with tax benefits
A typical ULIP in India offers several tax benefits. For instance, the premiums that you pay towards the plan can be claimed as deductions under section 80C of the Income Tax Act, 1961 to the tune of Rs. 1.5 lakhs per annum. That’s not all. The maturity benefits that you receive from the plan are also exempt from tax under section 10(10D) of the Income Tax Act, 1961. These deduction and exemptions are Subject to satisfaction of conditions mentioned in the Act. Note that if ULIP policy/policies are issued on or after 1 February 2021 with annual premium of Rs. 2.50 lakhs or more, gain form such policy/policies is treated as Capital Gain and taxed in the hands of recipient.
5. They offer a top-up facility
And finally, the versatility and flexibility that a Unit-Linked Insurance Plan offers is another one of the many reasons why they’re so popular in India. For example, if you have any excess unused funds with you or have received any windfall gains recently, you can choose to top-up your ULIP by paying a lump sum additional premium. This additional premium payment is used to enhance the fund value, thereby increasing the chance of generating higher returns.
A Unit-Linked Insurance Plan offers plenty of benefits to the policyholder. It’s no wonder then that it enjoys such popularity in India. That said, here’s something that you should know. Before you go ahead and purchase a suitable ULIP plan in India that suits your needs and requirements, always ensure to use a ULIP calculator. You can make more informed purchase decisions this way.