According to financial experts, there are two main components of wealth creation:
- Life insurance
- Investment in equities
When you invest in a ULIP, you get both these benefits and more. A ULIP plan in India gives you the dual advantage of investment and insurance. When you pay the premium, a small portion of it goes towards your life cover and the remaining part is invested in equities, debt funds, or both.
The main objective of a ULIP plan is to help you create wealth over the period of investment. Additionally, it is also helpful in providing the essential life cover that protects your family against uncertainties, such as losing their sole breadwinner to an accident or illness.
Since a portion of your ULIP plan is used towards an investment fund, it equips you to fulfil your long-term life goals, such as paying for your child’s education or any other important event.
How Does ULIP Work?
By now, you may already know the ULIP full form – Unit Linked Insurance Plan, which is a financial product that helps an investor get a dual benefit of comprehensive life insurance along with an investment component.
When you invest in ULIP, the insurance company will take a portion of your premium and invest it in shares or bonds. The balance amount is used to provide you with insurance cover as per your needs. These funds are managed by trained fund managers who track the market movements and make the right investment decisions on your behalf.
As the principal investor, however, you can choose the asset allocation of funds as per your risk tolerance. A high-risk investor can invest in an equity fund, a low-risk investor can choose relatively safer debt funds, and a person with moderate risk capacity can invest in balanced funds.
Your fund manager will help you make the right choice based on the market’s performance and other factors that will help you make maximum returns from your investment.
Beneficial Reasons Regarding Investing in ULIPs
Still wondering why you should add ULIPs to your financial portfolio? Mentioned below are some good reasons to consider ULIP for investment purposes:
- Life Cover
With ULIPs, you get a life cover along with an investment component. It gives your family the assurance that they will be taken care of, should something happen to you.
- Tax Savings
ULIP investments are eligible for tax savings u/s 80C, and the returns on maturity are also tax exempted u/s 10 (10D).
- Long Term Goals
If you have long term goals, such as buying a house, a car, pay for your child’s education abroad, etc., then ULIP will serve as a good investment option. Your wealth will grow throughout the investment period, and you can benefit from the power of compounding.
As a result, your returns are higher when you invest in a ULIP plan. While it comes with a 5-year lock-in period, you can exit the policy sooner by paying a fee. However, you will benefit from it most if you stay invested in it for at least 10-15 years.
As discussed earlier, ULIPs allow you to make fund switches between debt and equity, based on market performance. Insurance companies offer some of these switches free of cost. So, be sure to check about that before investing with a particular insurance provider.
Things To Consider As An Investor
Here are some things you need to keep in mind when you are investing in a ULIP plan:
- Define Your Goals
If your main investment purpose is wealth creation, then ULIP will be a suitable instrument for you.
- Compare Policies
Once you have identified your personal and financial goals, you must take time to compare various policies before making an investment. Learn about the expenses, premiums, ULIP performance, etc. You should also evaluate the funds that the ULIP normally invests in. It will allow you to determine the ROI.
- Risk Appetite
It would help if you kept in mind that the risk factor in ULIPs is higher than ELSS. So, unless you have an appetite for risk, you should avoid investing in ULIPs.
- Surrender Value
ULIP has a lock-in period of five years. If surrendered in the first three years, your insurance cover will no longer exist. However, you will be eligible for surrender value that will only be paid if you complete three years.
ULIP offers you a lot more than traditional insurance. It not only covers your life risk but also gives you the option to grow your wealth. With the right investment strategy, you will be able to fulfil your life goals with ease. Just keep all these points in mind before making an investment.
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