ULIP stands for Unit Linked Insurance Plan. It is a coverage that combines both insurance protection and investment. It ensures your family and lets you create wealth. The plan allows withdrawals during emergencies. Thus you may use it as a withdrawal plan to take care of your expenses after retirement.
The majority of average investors lacks an in-depth understanding of this plan. As a result, they surrender their ULIP policy before it gains maturity.
How does ULIP work?
In Unit Linked Insurance plans, insurers invest the money they receive from policy-holders. They invest it in the type of fund each investor chooses. Upon investment, the entire corpus gets divided into different units. Each unit will have a face value. Every single investor then gets a certain number of units. The number of units being allocated to an investor depends on the money being invested. The value of a unit is known as the net asset value. The fluctuations of the assets being invested in getting reflected in the net asset value.
When you withdraw money from the investment, the insurer sells certain units in proportion to the amount withdrawn. Your insurer may or may not charge you for the trade.
Why take a ULIP plan?
ULIP is the only policy that combines insurance and wealth creation. It ensures that you can invest in a market-linked scheme without compromising your insurance cover. Here are the other amazing benefits the plan has in store for you:
- Utmost flexibility in investment options
A ULIP plan lets you choose your investment portfolio in accordance with your appetite for risk or your ultimate financial goal.
If you are averse to risk and are investing for your retirement, the best option is to go for bonds. Balanced funds would suit best to moderate risk-lovers. If you are not scared of risks, you can happily invest in inequities. You may also combine these options as per your requirements.
- Complete transparency
When you plan to buy a ULIP policy, your insurer informs you of the following things:
- All the charges you may incur during the policy tenure
- Expected returns from your investment
- The value of your investment
- Your quarterly investment portfolio
- Account statements every year
- A daily report on the NAV
This ensures that you are fully aware of the product you purchase.
- It instils the habit of saving
Big-spending like buying a new home or bearing the cost of your child’s higher education requires large sums of money. This necessitates that you save money from the moment you plan for it. ULIP coverage makes it feasible and affordable.
As it is a long-term investment option, you learn the art of disciplined saving. And handling these costly things becomes a breeze for you.
- It is a great tax-saver
Taking ULIP coverage is the best way to avoid tax on your investment. The policy ensures this benefit at every stage.
In the entry stage, the premiums you pay are tax-exempt based on Section 80 C and Section 80 D of the Income Tax Act. And in the second stage, you start receiving returns. These, too, are tax-exempt. In the third stage, you explore the possibility of switching investment portfolios. This, too, is a tax-free process. And in the final stage, your policy matures, and you start receiving benefits. This, too, is not taxable as per Section 10 D of the IT Act.
Maximizing your returns from a ULIP policy
ULIP is a long-term investment plan with a lock-in period of five years. If you wish to maximize your returns from this policy, you need to go for longer terms for ten to 15 years. This lets you reap the benefit of compounding. This implies that your money gets re-invested for the principal amount. This lets your investment grow with each year. This will work wonders if you plan to take a big financial commitment.
Switching funds every year, too, would do wonders for your investment. Insurers in India let you change your investment portfolio several times a year. Let a rising market work in your favour through a debt fund. And if the market is on the decline, you can happily go for an equity fund. You may also change your strategy based on your attitude towards risk.