How ULIPs Can Help in Meeting Long-Term Goals
When you earn, you have a goal in mind for which you are earning, be it to fulfil the needs of you and your family or fulfil some financial dreams that you may have. Without proper savings and investments in place, it’s difficult to achieve your long-term goals, be it buying a house, having a retirement corpus, travelling, or saving up for your child’s education. The right way to achieve your goals would be to have a diversified investment and savings. A diversified portfolio allows you to achieve your goals while keeping yourself secure. The need for an individual to have financial security while earning returns on investment has led to the popularity of the Unit Linked Insurance Plan (ULIP).
ULIP is a two-in-one policy that offers you life insurance and opportunities for investment in a single plan. You pay premiums for your ULIP policy similar to any other life insurance. However, it is utilised differently, where the premium is divided and used towards providing you with a life cover and partly allotted to funds of your choice. Before you buy a ULIP, it is important to understand how it helps you to meet your long-term goals.
Several fund options
ULIP differs from your traditional investment. When you buy a ULIP, you can choose the funds that you want to invest in. There are several types of ULIP that can be broadly divided into three categories based on your risk appetite. The three types are debt, equity, and balanced funds. Debt funds are for investors who have a low-risk profile. With low risk, debt funds usually offer lower returns than equity. If an investor will take risks, they can simply invest in equity funds. They have high risk but usually offer substantial returns in the long haul. For those who want to mitigate partial risk, they can simply invest in balanced funds. They are a combination of debt and equity funds. The variety of choices ensures that every investor’s needs are met with a policy like a ULIP.
When you get your paycheck, how many times do you decide to save and procrastinate until your paycheck is almost over? With your needs and necessities, it is easily possible to forgo your long-term goals while meeting your present needs. When you buy a ULIP, you get life insurance along with an investment. Pay recurring premiums, for it ensures that you are investing some funds aside. The recurring premium inculcates the habit of savings for the policyholder. You can use a ULIP plan calculator to check if your investments are enough to meet your long-term goals. Having recurring savings builds significantly in the long haul with compounding and allows you to create an enormous corpus of funds.
When you make an investment, if you are unhappy with it, you usually cannot switch your fund allocation. You either have to dissolve your funds completely or hold them, even if you are unsatisfied. You can switch between different types of ULIP funds anytime you want. Most plans allow you to switch two to three times for free during the entire tenure of the policy. Based on your growing financial goals and investment strategies, you can switch your allocation from debt funds to equity funds and vice versa anytime you want. Also, since ULIPs are directly subjected to market fluctuations, the ability to switch funds allows you to make most of the changing markets. It allows you to maximise your returns while mitigating risks by switching funds as the market changes over the years.
Tax exemptions and deductions
When you buy any financial instrument, a key factor to consider is its tax implication. Especially in the long haul, you want instruments that provide you with a tax advantage. A key component of purchasing a ULIP is that you get tax benefits on multiple levels. You can claim tax deductions for the premiums that you pay for your ULIP under Section 80C of the Income Tax Act. You can use a ULIP plan calculator to get an estimate of the premiums payable. The maturity amount that you receive when your plan matures is also subjected to exemptions, provided certain conditions are met. If during the policy duration, you, as a policyholder, lose your life, the nominee will receive the death benefit. The death benefit is the sum assured or the fund value of an investment, whichever is higher. It is also exempt from any taxations according to Section 10 (10D) of the Income Tax Act, subject to terms and conditions mentioned therein.