Investing in various investment instruments as per the risk capacity, buying an insurance policy, and tax-saving are integral parts of the financial planning process. People tend to make investments to create a corpus over time, which also provides tax benefits. However, when it comes to buying an insurance policy, people are mostly looking for a plan that offers them protection against the uncertainties of life.
What if there is an insurance policy that covers all three aspects, investment, insurance, and tax benefits to help you accomplish your financial goal? ULIP or Unit Linked Insurance Plan is such a product.
What is ULIP?
Unit Linked Insurance Plan is quintessentially an insurance product, which, along with offering a life insurance cover, allows you to invest in the money market and funds of your choice. With ULIPs, you can invest in debt funds, equity-related funds, or balanced funds, which is a combination of the two.
The premium you pay for the ULIP is divided into two parts – one part goes towards life protection. The other portion is allocated towards investment in equities, stock, bonds, etc. as per the policy mandate.
Under ULIPs, the insurance company allocates the units to you at NAV, which is declared every day. However, you must note that you must bear the investment risks.
There are two types of ULIPs – Type 1 ULIP and Type 2 ULIP. In the event of your unfortunate demise, under Type 1 ULIP, the insurance company pays the beneficiary, either the sum assured or the fund value, whichever is higher. However, under Type 2 ULIP, the insurance company pays the sum assured and the fund value.
Just like other tax-saving investments, ULIPs too have a lock-in period of five years, which means that you cannot withdraw the funds until five years from the date of starting the investment. If you choose to stop paying the premium before five years, you will receive the payout only after five years.
Benefits of ULIP
- Higher returns potential
One of the important reasons why many people prefer investing in ULIP is that it allows them to earn valuable returns in the long-run while maintaining a relatively low-risk profile. Historically, the ULIPs are known to offer higher yields than traditional investment options like savings bank accounts and recurring deposits.
Additionally, suppose you are not satisfied with the funds’ performance, you can make the necessary changes to your investment portfolio as per your needs and invest in more high-performing funds and get better returns.
- Risk mitigation
Another significant benefit of investing in ULIP is that the investment is managed by professional fund managers who invest judiciously in high-performing funds based on their calculations. Thus, by investing in ULIPs, you not only get professional help but also get your funds safer from various market-related risks. It is an excellent investment option for you if you want to expand your portfolio without the need for managing the associated risks.
- Gives you liquidity of funds
Typically, the unit-linked insurance plans have a five-year lock-in period, making it an ideal choice of investment if you are looking for a short-term to mid-term investment option. After the completion of five years, you have the flexibility to partially withdraw the funds, without the need to pay any penalty or withdrawal fees. Thus, you get the benefit of liquidity, and you can get the funds during an emergency.
- Tax Benefits
The tax benefits of ULIP cannot be undermined. Since it is primarily an investment product, the amount you pay towards the premium is eligible for tax benefit under Section 80C of the Indian Income Tax Act, 1961. The tax benefit deduction limit is set to Rs. 1.5 lakhs per annum. Additionally, the maturity benefits are tax-free under Section 10(10D).