There are so many investment options available in the market that choosing the right plan can be difficult for some people.
Many of us are reluctant to invest as most policy returns are highly dependent on the stock market. Since market fluctuations are unpredictable, one cannot saywhether their investments will earn good returns in the future.
Because of this, people avoid investing in plans that generate market-linked returns to avoid the risk involved. In this section, we will be discussing Unit Linked Insurance Plans (ULIPs) and how it helps us mitigate market risks.
Before we dive deep into the subject, let us understand what ULIP policy is.
ULIP is an insurance policy that offers the benefits of investments as well. Hence, it is known to provide dual benefits of life insurance cover and wealth creation. A part of the premiums paid towards the plan is used for life insurance coverage, while the remaining amount is used to invest in funds of your choice. Here, you have the liberty to choose the type of funds to invest in – debt funds, equity funds, or a combination of the two.
ULIP and Market Investment Risks
Let us understand the investment section of the policy in detail.
As stated before, ULIP investment gives you the liberty to choose the type of funds you want to invest in – debt or equity. However, the investments should be made based on one’s risk appetite and future financial goals. For those who have a high-risk appetite can invest in equity funds; whereas the people with a low-risk appetite can choose to invest in debt funds.
On the other hand, if you are buying ULIPs at an early stage in life, try investing in equity funds for a long time. Equity funds perform the best and provide reasonable ULIP returns when you remain invested for a longer duration. Also, you can choose to invest in debt funds for immediate short gains. Later, when the policy is nearing maturity, you can shift entirely to debt funds to lower the risk on your returns.
Now you must be wondering how you can shift your investments once they are made. In fact, ULIP offers a fund switching facility to its investors. With this facility, you can switch between your funds (from debt to equity and vice versa) when needed.
Know that certain insurers offer no limit on the number of times you can switch between the funds. But some insurers provide a limited number of fund switches. Surpassing this number will attract nominal charges every time you plan to shift funds.
Other Benefits of ULIPs
ULIPs are goal-based investments. Hence, you should have your future financial goals aligned to the ULIP investment you plan to make. Moreover, as explained earlier, the policy offers good returns when you stay invested for a long time.
For this very reason, ULIPs come with a five-year lock-in period. Until the completion of the lock-in period, you cannot make any withdrawals from the policy. You can terminate the policy but will receive the payout only after the lock-in period ends.
In addition, ULIPs have several tax benefits. The premiums paid towards the policy can be claimed for tax deductions under Section 80C of the old tax regime. The maturity and death benefits received on ULIP investments are tax-free under Section 10(10D) of the Income Tax Act, 1961.These ULIP tax benefits, deductions and exemptions are subject to the provisions stated in the Income Tax Act 1961, as amended from time to time.
ULIPs are a good investment option for all kinds of investors. The policy offers you the benefit of life insurance coverage and wealth creation over time. However, make sure that you are comparing different ULIPs online before making a decision.