A Unit Linked Insurance Plan (ULIP) is a unique financial product that offers the dual benefit of insurance and investment. It offers life insurance coverage while also allowing you to invest in a range of investment options such as equity, debt, or balanced funds, depending on your risk appetite and investment objectives.
The ULIP premium is split into two parts – a small part is directed towards life insurance coverage, and the other part is invested in the market. Including this hybrid product in your investment portfolio offers several benefits.
Benefits of including ULIP in your investment portfolio:
1. Dual advantage
Unlike traditional insurance policies, ULIP plans not only offer life cover but also allow you to invest money in market-linked instruments to build a significant corpus. Adding this comprehensive financial product to your portfolio helps you take care of two goals in one investment – ensuring financial security for your loved ones and building corpus for your future goals.
2. Secure long-term financial goals
ULIPs are designed for long-term financial goals such as children’s higher education, home purchase and more. The lock-in period of five years ensures you remain committed to your financial goals and avoid premature withdrawals that can pull you off track. When you stay invested for a long term, the power of compounding does the magic, resulting in substantial wealth creation over the long run.
3. Flexibility
ULIP plan offer the flexibility to choose from a variety of funds (equity, debt or balanced) based on your risk-taking ability and investment objectives. You can choose the percentage allocation into these funds ranging from high-risk to low-risk as per your need. Additionally, ULIPs provide you the flexibility to switch between different funds without any additional charges. A certain number of switch transactions are free in a year and you can adjust your investment strategy in response to market volatility or change in your financial goals.
4. Transparency
ULIP plans are complex in nature but are highly transparent as they are offered as per the guidelines of IRDAI (Insurance Regulatory and Development Authority of India). Policy document contains clear details of the policy, clauses, charges and more. You also get regular updates on the fund’s performance, the value of funds, and the allocation of premiums. You can monitor your portfolio closely and make informed decisions depending on the market conditions.
5. Wealth creation
By adding ULIP to your investment portfolio, you can create wealth as it allows you to invest in market-linked instruments. Equity funds within ULIPs have the potential to deliver high returns, especially over the long term. If you have a higher risk appetite, this can be a valuable avenue for achieving long-term goals through wealth creation. If you are looking for steady returns, you can switch to debt funds or balanced funds within ULIPs that offer stability and lower risk.
6. Tax benefits
ULIPs are considered to be a tax-efficient investment product for the long term. The ULIP tax benefits include the tax deductions allowed under Section 80C for the premiums paid towards ULIPs of up to INR 1.5 lakhs per financial year. The death benefits or the maturity proceeds are tax-free under Section 10(10D), provided certain conditions are met. These ULIP tax benefits make it a lucrative option to include in the investment portfolio.
7. Liquidity
ULIPs are typically designed for long-term goals. However, there is an option of partial withdrawals after the completion of a five-year lock-in period to offer liquidity to investors. You can withdraw partially from your ULIP in case of emergencies or unforeseen financial requirements. There may be limits and specific conditions applicable based on the policy terms of your insurance provider.
8. Instils financial discipline
Paying premiums on a regular basis and the mandatory lock-in period instil a sense of financial discipline among investors. This disciplined approach helps in systematically building a corpus over time, helping you to meet long-term financial objectives such as retirement planning, children's higher education or dream vacation.
Conclusion
In conclusion, a Unit Linked Insurance Plan (ULIP) can be a valuable addition to your investment portfolio, offering the dual benefits of life insurance and wealth creation. The tax efficiency, customisation, suitability for long-term goals, and flexibility to switch between different funds make ULIPs a versatile financial product to add to your investment portfolio.
ULIP is a compelling choice that can play a vital role in enhancing your investment portfolio. However, it is crucial to assess your risk tolerance, financial goals and investment horizon before investing in a ULIP. It is important to make an informed decision and choose a ULIP that aligns with your overall investment strategy.
This post first appeared on The Kashmir Pulse
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