ULIP is a type of life insurance plan that offers dual benefits of insurance & investment under one single plan. Under this plan, a part of the premium is allocated towards life insurance & the remaining towards market-linked funds, i.e. debt, equity, or balanced funds. Many investors prefer a ULIP Policy as it provides transparency, flexibility, & long-term wealth creation benefits. One of the best advantages of the plan is that investors are not required to review their investments regularly, as the inconvenience is handled by the insurance company, the charges of which are included in the plan. Apart from this, there are many benefits ULIP offers, including both short-term & long-term. Let u evaluate them one by one.
Table of Contents
Long-Term Benefits of ULIP Plan
ULIPs are considered to be long-term investment plans, which primarily serve purposes like a child’s higher education, a child’s marriage, retirement, etc. This plan comes with a lock-in period of 5 years with the benefit of compounding, hence providing higher returns. Let us assess the benefits it offers in the short term.
Higher Costs Initially:
Initially, when the amount of investment & returns thereon are lower, the ULIP charges are on the higher side. These charges reduce as the years pass by. ULIPs offer high returns in the long run with reduced risk, which is not the case in the short run, as market fluctuations come their way. Hence, an investor should remain invested for a period of at least 6 to 10 years.
Market Linked Returns:
Investors can choose between debt funds & equity funds depending on their risk tolerance levels. Those looking for huge returns should invest in equity as they will reap higher returns in the long term, averaging the short-term market fluctuations.
Flexibility of Fund Allotment:
Investments have to be altered depending on the financial objectives, & which ULIPs allow too. This means investors are allowed to switch between the funds, aligning their risk tolerance level with financial objectives. But this benefit works well when you remain invested for a longer period to carefully assess the market trend.
Benefit of Compounding:
It means gaining benefits from the wealth growth, i.e., generating returns on the initial principal amount & interest earned previously. This means interest on interest, which means the returns amount becomes the principal amount, thus increasing the overall returns.
Short-Term Benefits of ULIP Plan
Many investors look for a Short Term Investment Plan, though ULIPs are not an appropriate choice for it, but still, it helps you meet short-term financial commitments once the lock-in period of 5 years is met. Let us assess the benefits it offers in the short term.
Encourages Saving:
ULIPs facilitate wealth creation by inculcating the habit of savings in an investor. ULIPs come with a lock-in period of 5 years, which builds a habit to save funds since inception, encouraging the saving habit. Also, in case of early withdrawal of funds, it would attract ULIP charges.
Provides Security:
This plan offers the dual benefit of insurance & investment. This means that in case of the sudden demise of the policyholder, the beneficiaries would get death benefits, ensuring the financial security of the family members in their absence.
Enables Flexibility:
ULIP also consider the changing financial commitments, allowing the investors to gain higher control over their funds. This means a policyholder is allowed to switch between the funds & change the amount of investment made towards life insurance. Additionally, investors are also allowed to switch their investments from equity to debt & vice versa, depending on their financial requirements.
Grants Tax Benefits:
Under ULIPs, the amount paid towards premium is eligible for a tax deduction u/s 80C of the Income Tax Act, 1961. Additionally, the maturity proceeds are exempt from tax u/s 10 (10D) of the Income Tax Act, 1961. If the amount of premium paid towards the plan is more than 2.5 lakhs, the maturity proceeds will be treated as long-term capital gains & will be taxed accordingly.
Choose ULIP if:
- You want dual benefits of insurance & investments.
- You are willing to take risks for higher returns.
- You are willing to invest in market-linked securities.
- You have medium to long-term financial objectives.
- You wish to switch between the funds depending on the market conditions.
- You want to be financially independent & stable in the near future.
Disadvantages of ULIPs
Provided are the disadvantages of ULIP:
- The returns on ULIPs are subject to market risks, hence always leaving a scope for uncertainty.
- As a single premium amount is to be paid for dual purposes, i.e. insurance & investments, it is quite higher in comparison to a term insurance plan.
- Being a market-linked plan, they keep on fluctuating invariably, always maintaining room for loss with the decrease in share price.
- This plan comes with a minimum lock-in period of 5 years, before which, if any amount is withdrawn will attract penalties & additional charges.
- This plan allows a certain fixed number of times to switch between the funds; more than this will attract additional charges.
- The initial premium cost is higher compared to the later ones due to them being directed towards higher premium amounts.
- This plan is complex to understand for the new investors, as they are required to maintain records of premiums & investments.
Conclusion
ULIPs help combine the dual benefits of growth & protection under one single plan. One should choose to invest in those funds that well align with the financial objectives, risk tolerance level, & investment horizon. This means before making a final decision to choose a plan, one should also look, compare, review & evaluate all the available plans on the basis of their pros & cons. Hence, an investor is advised to choose a plan that best aligns their future financial objectives. Also, an investor can seek professional guidance to decide in which funds the amount should be invested to make an informed decision.