Ch. 2: Why You Should Invest in ULIP?

You may be looking for ways to invest your money to grow your wealth. There is a wide array of financial instruments available on the market to serve this purpose - from mutual funds to insurance plans to fixed deposits. One of the most popular instruments for investment is Unit-Linked Insurance Plan.

If you are looking for a reliable option that assists you to generate wealth in the long run, then a ULIP is the ideal choice. ULIPs help you save money for long-term goals - saving for your spouse’s higher education, child’s wedding, buying a home, clearing off debts etc. These plans also ensure that your family will be financially secure if anything unfortunate were to happen to you - with an insurance cover.

In the previous article, we saw what a ULIP is. In this article, we'll discuss why you should invest in ULIPs -

Here are some reasons why a ULIP is a worthwhile investment option -

Wealth Creation

With a ULIP, you get the opportunity to invest in the stock market. If you do so consistently over a long period of time, it may yield very high returns at maturity.

The insurer invests the premium after deducting applicable charges in funds. ULIPs allow you to select from a wide range of fund options, including debt funds, equity funds, money market funds, and balanced funds. They can be chosen based on your investment objectives and risk appetite. The main goal of fund investment is to help you earn a higher return on your investment.

Fund Options:

• Equity funds The premium you pay is invested in the equity market. With this option, you are undertaking a high level of risk in order to benefit from the high returns of investing in the equity market through a professional fund manager. You can pick from large cap, mid-cap, and small cap equity funds.
• Debt fundsYou pay a premium that is partly or totally invested in debt instruments such as government bonds or corporate bonds. Compared with equity investments, these instruments offer much lower returns in the long run, and are considered to be safer and more stable.
• Money Market FundsA kind of debt instrument that invests money in short-term and highly liquid instruments like commercial papers, bank deposits, treasury bills, etc. They can offer good returns.
• Balanced fundsTo help investors reap the benefits of both the equity and the debt markets, the premium paid is invested in both debt and equity instruments. Investing in equity offers some upside potential and investing in debt offers some stability.

Provides a lump-sum amount to achieve your long-term goals
ULIPs are beneficial in the long run. A long-term investment will yield higher returns. When your policy period ends, you will receive a lump-sum payout as maturity benefit, i.e., the fund value, as calculated on the date of maturity.

The maturity benefit helps meet your long-term goals, for instance, your child’s education or marriage, down payment for a home loan, retirement planning, etc.

For instance, Ravi, a 30-year old, has invested in a ULIP and the annual premium for the plan is Rs 1,00,000. He wishes to retire at 45 and start his own business. He will need a substantial sum of money to fund his business. If he invests in an equity fund over a long period of time, the lump-sum amount he shall receive at policy maturity will help achieve his goal.

Allows you to invest small amounts of money over a long period of time and increase your wealth
This plan offers you a systematic approach to saving. Premiums can be paid monthly, quarterly, half-yearly or annually, depending on the terms and conditions of your policy.

When you pay these premiums, you are actually building substantial wealth that will help you achieve your long-term goals. These plans give you higher returns in exchange for your premiums. ULIPs allow you to save and grow your money simultaneously rather than just letting it sit in the savings account or overspending it.

Fund Switching

A major benefit of a ULIP is that you can switch between funds, if you are not satisfied with your current investment. You can immediately switch to another fund best suited to your financial goals. This feature aims to maximise your returns or protect your capital.
Here are some factors to consider before switching your funds:

➔ Analyse your risk appetite
You must evaluate the level of risk you can bear before considering a switch. You will need to assess your income, savings, etc. to determine the same.

➔ Consider your financial goals
Jot down your financial goals and the timeline you aim to follow. This will give you a detailed idea about the amount of money you’ll need at various stages of your life. For instance, investing in equity funds is riskier for short-term goals, but it might be ideal for long-term goals. Consider equity funds for wealth growth when you're just getting started. You can gradually switch from equity funds to debt funds, which are less volatile, as you approach your goal.

➔ Market movement
Market conditions affect the performance of the fund. If the market is not performing as well as you had expected, you can instantly switch your investment fully or partially.

➔ Life Stage
Each person has different priorities depending on their stage of life. For instance, younger people tend to have fewer liabilities so they can take more risks. On the other hand, your risk tolerance decreases as you age. When you're older, you can choose debt funds.

NOTE: No Capital Gains tax levied for Switching:

No tax is levied when you switch from one fund to another fund. In this case, ULIPs prove to be more advantageous than mutual funds as switching between mutual funds entails capital gains tax.

Allows Partial Withdrawal of Funds

The partial withdrawal feature is a unique aspect of ULIPs and one of the major reasons why people opt for them. With this, you can withdraw a portion of your ULIP’s accumulated fund value. This eliminates the need of selling your assets, taking out huge loans, or depleting your savings.

For instance, you may need immediate funds for a medical emergency, a loan or downpayment, child's school tuition, house repairs etc. This partial withdrawal feature will enable you to take care of such expenses without having to strain your savings.

Please note that you can withdraw money from your fund value only after a lock-in period of 5 years. This means that you cannot withdraw or liquidate the accumulated Fund Value for a period of 5 years.

For example, Sharath is a banker by profession. He bought ULIP in 2015 and has been paying an annual premium of Rs 50,000. In 2021, his father suffered a severe heart attack that required immediate surgery. In order to cover this sudden expense, Sharath drew money from his Fund Value. Sharath was able to withdraw money from his Fund Value as the 5-year lock-in period had passed.

Safeguard the financial future of your family

If you are the sole breadwinner of your family, it is quite obvious that you are financially responsible for the entire family. Should you suddenly pass away, you will be unable to meet your financial obligations and protect your loved ones. The option of having a ULIP allows you to plan for the future the way you want.

Your nominee will receive a Death Benefit in case of your untimely demise, so they won't face any financial hardships. The death benefit can be -

Either the sum assured or the fund value, whichever is higher
OR
The sum assured plus the fund value

Tax Benefits

• Under Section 80C of the Indian Income Tax Act, you can claim a tax deduction of up to Rs. 1.5 lakh for the premiums you pay for a ULIP in a financial year.
• When you withdraw funds from a ULIP after the lock-in period (5 years), the entire amount is exempted from taxation unlike mutual funds. There is no capital gains tax levied.
• In accordance with Section 10D of the Income Tax Act, the maturity proceeds you receive after the policy term are exempted from taxation.
• In case of your untimely demise, the nominee will also receive a death benefit which is exempted from taxation under section 10(10D) of the Income Tax Act.

A ULIP can be an excellent addition to your investment portfolio as it provides a perfect balance between providing insurance cover and maximising your returns. It is the ideal option for your family's financial security and your long-term financial goals. We’ll talk about the various benefits a UlIP offers - in our next article.