ULIPs: Is it Best for Achieving Long Term Financial Goals?

The dwindling increase in expenses added with a rise in inflation rates has forced the investors to look for a kind of investment which helps them to maximize returns on their invested money. The traditional form of investment tools like the fixed deposits (FD) are giving a meagre interest rate and the one like public provident funds (PPF) has a longer maturity period. Most of the investors in today's era look for smart yet higher returns on their funds, within short to medium tenure.

Saving your income from tax also has to be borne in mind while making an investment decision as this will help you to boost your income and helps you to achieve your desired investment goal. The Unit Linked Insurance Plans (ULIPs) comes in handy for investors over other forms of investment as they will be invested in stock markets through a mix of equity, growth and balanced schemes.

Let's take a sneak peek as to how it works and how it helps investors to achieve long term financial goals.

What is ULIP?

A ULIP, the full form of ULIP is a unit-linked insurance plan. It is a form of investment tool which provides for insurance payout benefits. It is one of the most popular forms of investment instruments in India which can be used as a tax savings instrument as well as for insurance coverage. It provides dual benefits - protection and wealth creation.

An investor can choose funds under a ULIP plan based on their financial goals for the long term and accordingly allocate money in equity and or debt funds respectively. Investors will receive the benefit of life coverage throughout policy by investing in ULIPs.

If one is looking out for a long term goal be it children's education or retirement planning or for house construction or purchase of a new car and so on one can go for ULIPs as it offers best returns on long term investment.

How do ULIPs work?

Once you start investing in ULIP, the insurance provider will invest a part of the premium amount in equities or debts and so on and the balance amount will be utilized to provide insurance cover to the investor. The fund managers in insurance companies will handle the investments and hence investor need not have to worry about tracking their investments.

The ULIPs provides an opportunity for its holders to switch between equity and debt-based investments (based on your risk-taking ability). Benefits of the flexibility of switching will boost the popularity of these investment instruments.

Please Note: There will be switching charges which an insurer will levy on investors for switching and some insurers may offer it for free.

Lock-in Period of ULIP

The Insurance Regulatory and Development Authority of India (IRDAI) during 2010 increased the lock-in period of ULIPs to 5 years from 3 years. The mantra which holds good for insurance policies applies to unit-linked insurance plans as well, the longer you hold the policy higher the yield it fetches.

ULIPs fetches better returns if held for a longer period and hence it is better to hold it for the entire tenure of the policy which ranges between 10 - 15 years.

Benefits of ULIPs

Investing in ULIPs has its share of benefits as it provides protection and helps individuals to plan for long term savings. Let's understand the benefits of investing in ULIPs.

Flexible Investment Options

Investing in ULIPs offers its investors with low, medium and high-risk investment options and all this will be available under the same policy. All you have to do is to pick a policy based on your risk-taking ability. The policy will provide the user to switch between the fund options without charging any additional expenses (differs with each insurer) in a year.

ULIP's provides you with the flexibility to either opt for a premium amount or sum assured, and this will entirely be based on your financial needs and requirements. You will also get an option for top-ups to increase the flexibility of your investment portfolio and to make the best and most of the investment opportunities amidst uncertain external environmental factors or due to fluctuation in your income flows.

Liquidity Factor

ULIPs offers partial withdrawal option for investors after a lock-in period of 5 years. In case of any financial emergency, the investor can go for partial withdrawal only,

• If the policyholder has paid premiums on time till date.
• The policy is in force to withdraw the premiums.

Life Cover

With ULIPs one will get a life cover along with investment. It offers security to the holders family as they can depend on it when emergencies knock the door (death of the taxpayer, major health issue, and so on).

Income Tax Benefits

Investing in ULIPs offers rebate under Section 80C of the Income Tax Act of 1961. In addition to this, returns on the matured policy of ULIP are exempt from Income Tax under Section 10(10D) of the Income Tax Act. This dual benefit drives the investor to go for ULIPs.

Choice of Funds

The ULIP offers a variety of market-linked investment funds to its investors which suits their risk appetite and financial needs. Hence it gives an option for individuals to invest in their choice of funds be it in stocks or balanced funds or fixed-income security.

The following factors will help us to determine whether investing in ULIPs is better for achieving long term financial goals?

Better Returns

Investors will get better returns from ULIPs compared to any other insurance product due to its equity advantage. The premium amount paid by you will be invested in various asset classes through different funds. So far, the tax savings funds have given double-digit returns, but the catch here is one has to look out for a new fund every year if it is a one-time investment.

Maturity amount usually depends on the performance of the stock markets during the tenure of the policy and in addition to this endowment plans are designed in such a way that you will be receiving your lump sum amount after the completion of specific tenure.
When it comes to tax efficiency, the entire maturity amount arising from ULIPs are tax-free and this makes it the best option amongst the other forms of investment options. Though 5-year tax savings fixed deposits also have a five-year lock-in period, the interest amount earned on it is taxable.

Dual Advantage

ULIPs offers insurance and wealth creation for investors in a single product. On one hand, you can invest funds as per your choice be it in stock markets or balanced growth funds or debt funds and on the other hand you will get life insurance protection on the premium amount.

ULIPs provides a wide choice of investment options for its investor based on risk appetite. For example:

• If you are a high-risk taker then you can opt for equity funds
• If you are a moderate risk taker then you can go for balanced funds
• If you are a low-risk taker then you can opt for debt-based funds

Flexibility

During the tenure of the policy, the holder has an option to switch funds. You can either pick growth, income, equity, balanced funds based on your financial goals and risk-taking capability. Usually, four switches are allowed per year free of cost.

Unlike investing in equities, you need not have to track their performance in stock markets daily. All you have to do is to choose the policy and you can change the fund allocation anytime during the tenure of the policy and run it till maturity to earn benefits in the long term.

Lock-in Period

The unit-linked insurance plans have a lock-in period of five years and this will induce a disciplined savings habit amongst the investors. As ULIP is a long term insurance contract, the lock-in will be calculated from the date of the issue of policy. Investors can pay the premium amount either monthly or annually or as a lump sum as per their preference.

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About the Author

Archana is a Content Writer at GoodReturns. She has been writing articles related to investment planning and personal finance for more than two years.