Most of us have an insurance plan that is separate from our investments. We invest in both of them through a different medium and study them individually as different schemes. But, what if they were somehow linked? Wouldn’t it be great to have a tool that invested in the market and in an insurance plan at the same time? Imagine the time and energy you’d save!
Fortunately, that isn’t just a hypothesis. A financial tool named ULIP (unit-linked insurance plan) works exactly that way and this article will give you a thorough understanding of everything you need to know about it.
What is ULIP?
First introduced in the year 1971 by the Unit Trust of India (UTI), a ULIP is a dual scheme that puts your money in life insurance and the capital markets at the same. When you buy a ULIP, the insurance company puts aside some of the money you pay in a mutual fund scheme, shares, or bonds. A dedicated fund manager looks after your investments and makes the right decisions for you. The investments can be goal-oriented, so there’s great flexibility as well.
How does a ULIP work?
The ULIP is a really simple scheme to understand. When you invest in it, which is usually through an insurance company and in the form of premiums, part of your money goes into getting your life cover. The other part goes into an investment scheme, like stocks or mutual funds, where the money goes depending on how well the scheme does.
While a dedicated fund manager looks after these investments and advises where to put the money, you can switch around your portfolio depending on your needs. You have the freedom to invest in different funds as well, while some companies may allow you to create a customized ULIP for yourself.
Starting in 2010, the lock-in period, which was initially three years, was increased to five years. That said, as an investor, it’s always better to hold a ULIP for a long time. This is because both insurance and mutual funds pay well when held for 15 years or more.
What are the advantages of a ULIP?
ULIPs come with a host of benefits, but are some of the major ones are:
- Income tax benefits
Investing in a ULIP is quite rewarding. A premium paid towards the scheme is eligible for tax deduction under Section 80C of the Income Tax Act of India. What’s more, the returns earned out of the policy on maturity are fully exempt from tax, as per Section 10(10D) of the Income-tax Act.
- Life insurance
There are many reasons to get life insurance, which means there are as many, if not more, reasons to get a ULIP. Life insurance secures your family’s future and leaves them in a financially stable situation in case of your untimely death.
- Flexibility to change investment strategy
A ULIP offers investors the opportunity to change funds and tweak their investment strategy. This is a great feature that allows you to fully utilise the market and offer your portfolio more chances for growth.
ULIPs stand out from most of the financial instruments in that they offer both life-saving and investing opportunities. It is a straightforward way for you to enter the market and enjoy the advantages of risk-bearing when allocating the role to professionals. Tax exemptions and the flexibility of options make them an ever more enticing idea.
Hence, ULIPs can appear to be the ideal solution to your insurance and investment needs. Even so, it is necessary to note that ULIPs have their limits. If you want to buy a pure term cover instead, it would cost you a lot less and give you more coverage even if you don’t make any returns.
At the very same time, one can invest in equity via mutual funds or stocks thereby saving on the high cost of ULIP. Your total returns are likely to be higher this way, while your coverage would also be greater.