A ULIP policy comprises of two beneficial components, which include life insurance and investment. Until the intervention of the Insurance Regulatory and Development Authority of India (IRDAI) in 2010, ULIP was an inferior product, mainly because of the excessive charges of 6-10%. The IRDAI had made numerous alterations, including capping of the costs, which led to the product’s popularity.
Let us first discuss what is ULIP and how it works, after which we will explain why it is a safe investment avenue.
ULIP is a type of life insurance policy with the added benefits of investments. The amount paid by policyholders towards the premium is divided into two parts. One portion secures the life cover, whereas the other segment is invested in equity, debt, or hybrid funds. ULIP offers numerous benefits due to which it has emerged as a prominent product for wealth creation.
Why ULIP is a secure investment alternative
Here is a list of five reasons that make ULIP a stable investment option:
- Ideal for beginners
If you are a first-time investor, you can avail of the dual benefits of insurance and investment offered by ULIP. Such a plan helps you in securing your family’s monetary future. Moreover, you can invest in different types of funds, like equity, debt, and balanced funds, as per your risk-taking capacity. As a new, risk-averse investor, you can consider investing in debt and balanced funds to build a diversified portfolio and mitigate the risk.
- Higher returns
Compared to any other insurance plan available in the market, the ULIP policy offers a better investment return, as you have the exposure to invest in equity funds. The premium that you pay is invested in different asset classes. For instance, if one of your asset classes is in loss, it can be covered by the profit earned in another asset category. It is one of the reasons why ULIPs can provide better returns. You can expect a minimum of 10-12% of returns from top performing ULIP funds if you stay invested for a long tenure. The returns that you earn on the plan’s maturity are tax-free, making ULIP an effective wealth-generation tool as compared to other investment instruments available in the market. Low-risk investments like fixed deposits also offer some tax benefits, but the income earned from it is taxable.
- Lock-in period to encourage financial discipline
ULIP comes with a mandatory lock-in period of five years, which is one of the reasons that it inculcates a saving habit. The lock-in duration also depicts that you cannot break the policy midway, making ULIP a healthy and secured investment option. By investing in ULIP, you can get the tax benefits until the date of maturity, making it an attractive investment choice.
The possibility of switching from one plan to another makes ULIP an ideal investment option. Based on the volatility of the equity market and your risk-bearing appetite, you can shift from an equity fund to a debt fund to curb the losses that can occur due to the market’s poor performance. In ULIPs, you have the choice to invest in equity, debt, or hybrid funds, as per your risk-taking capacity and long-term financial objectives.
- Dual tax benefits
The premium that you pay towards the ULIP is permissible for a deduction under Section 80C of the Income Tax Act, 1961. Besides this, the income that you earn on maturity is tax-exempt, according to Section 10(10D) of the Act.
With ULIPs, you can meet various life goals, like children’s higher education and wedding, or buying a new residential property. Investing in top-performing ULIP funds for a long period will help you in transforming your ambitions into a reality and secure your family’s financial wellbeing through the life insurance component.