With each passing year, the need to create wealth increases as the rates of inflation rise. Along with wealth creation, what’s also quite important and non-negotiable in terms of financial planning is having a life insurance policy. A ULIP or a Unit-Linked Insurance Plan is an effective way of achieving both aspects under one product. While ULIPs have been present in the market for a long time and have gained popularity, recent trends make it an even more important product to have in your portfolio. Let’s take a detailed look at the reasons why.
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How do ULIPs work?
As mentioned earlier, ULIPs do the dual work of life insurance and investment. A ULIP manager carries out this task by dividing the premium into two. One part of the premium goes into building the life cover amount and the other is directed to the investment avenues of your choice. Depending on the asset classes you have invested in, you receive returns. Equity funds may yield more returns by leveraging high risks while debt funds take a more low-risk, low-reward approach. A ULIP return calculator can help you get an estimate of the returns from the two different asset classes.
Now that the underlying workings of a ULIP are clear, let’s see why it would make a good investment option.
Reasons to invest in ULIPs in 2022
Two vital features under one product
An investment scheme and a life insurance policy – both are essential additions to any financial portfolio, according to sound financial advice. A ULIP plan removes the hassle of having to deal with two different products to meet these two different needs. By paying a single premium, you not only insure your life but also attain the chance to receive returns based on market performance.
The life coverage aspect secures the future of your loved ones in the event of an unfortunate and untimely demise. It also provides you with a deeper peace of mind, because you have the reassurance that your family will not suffer from any kind of financial difficulty in your absence.
The investment aspect, on the other hand, builds wealth for your dreams, whether it is to buy a car or pay for your children’s higher education abroad.
Tax benefits
ULIP tax benefits are quite considerable, which makes it a good product for anyone looking to save tax. Your ULIP premiums help you claim tax deductions up to Rs 1.5 lakhs as per Section 80C of the Income Tax Act, 1961. The different kinds of pay-outs, such as death benefit pay-out, surrender value pay-out, and partial withdrawal pay-outs, are also exempted from taxation as per Section 10 (10D).
Tax benefits depend on the terms and conditions and the kind of tax regime you choose. Section 80C and Section 10 (10D) ULIP tax benefits are only applicable for people who have opted for the old tax regime.
Fund switching option
One feature that makes ULIPs stand out from others is the fund switching option. As per this option, the investor can switch from one asset class to another depending on their needs. So, you can shift your funds from equity instruments to debt instruments if you think that the markets would be undergoing a low phase soon. Similarly, if you want to benefit from a positive change in the interest rates, then you may want to shift your funds to debt instruments.
One can opt for the fund switching option multiple times in a year. However, some insurers may have a limit as to the number of switches you can do. You should opt for an insurer that offers the maximum number of free switches in a year.
If you plan to hold the switch position for a longer period of time, then you can use a ULIP return calculator to check the returns you can expect.
Systematic investment and returns
With a ULIP, you can plan your investment in the markets in a systematic manner. Your premium payments can be done monthly, quarterly, or even annually. This ensures that the money is debited from your account into the ULIP and invested accordingly.
Similarly, you can also choose to receive pay-outs via a systematic withdrawal plan, wherein a certain amount of returns is credited to your account at the frequency of your choice.
These features and more make for adequate reasons to invest in 2022. With life insurance and investment in your portfolio, you and your family can breathe more easily, knowing that the future is taken care of to a great degree. Do consult a professional before going ahead.
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