Investments that earn high returns and life insurance that protects your family’s financial future are two of the most important components of any individual’s portfolio. A Unit Linked Insurance Plan (ULIP) combines these two into one compressive product.
A ULIP policy uses part of the premium towards your life insurance cover and invests the rest in funds of your choice. This allows you to enjoy market-linked returns while also having the life insurance component in place.
ULIP returns in 10 years
A ULIP policy has a lock-in period of five years. But to really reap the benefits of high returns, experts advise staying invested for a period of 10 years at least. This is because past performance has shown that ULIPs have given returns between 12 to 15% for longer investment horizons.
Since a part of your premium is invested in the market, a longer investment horizon will allow your investment to iron out the short-term fluctuations and hedge overall investment risk. This is the case with any equity-oriented investments. You do have the choice of where to invest your money. Depending on your risk appetite, you can decide to invest in equity, debt, or a combination of both.
There are certain reasons why a ULIP policy is a great instrument to consider for creating wealth in 10 years. They are:
- Fund switching facility
A ULIP policy is a strategic investment that allows you to minimise your risk and maximise your returns by changing your asset allocation multiple times over the 10-year period. You can switch funds depending on changes in your risk appetite and financial goals. Similarly, you can switch funds according to the market performance. For instance, if the market becomes more volatile, you can increase the proportion of your investment in debt funds as opposed to equity. The feature of fund switching allows you to regularly rebalance your portfolio and enables you to assess the performance of a fund and switch accordingly.
- Tax benefits
The premiums paid for ULIP policies are deductible for tax purposes under section 80C of the Income Tax Act, 1961. This benefit is up to Rs 1.5 lakh per financial year. The maturity amount, too, is tax-exempt under section 10(10D). Due to the introduction of the new tax regime, it’s recommended to consult your financial advisor or insurer, to gain clarity on which tax benefits you are eligible for. Compared to other tax-saving instruments such as National Pension System (NPS), Public Provident Fund (PPF), etc., the ULIP returns in 10 years are higher. Hence, ULIP is a great way to save tax and create wealth at the same time.
In addition to the fund switching facility, a ULIP policy offers flexibility in several other aspects. For instance, in case of a financial emergency, you can access your funds through the partial withdrawal facility post the lock-in period. You can also choose to top up the fund according to your new financial goals. Even when it comes to premium payments, you can choose the premium payment term that is suitable for you.
- Insurance protection
Having a life insurance policy in place is crucial for looking after your family’s financial well-being when you are no longer around. The life insurance component of a ULIP policy ensures that your family can manage expenses, maintain their standard of living, meet their goals, and handle any debt left to service even in your absence. The death benefit payout on the demise of the policyholder serves as a financial cushion and prevents the life savings of the family from being wiped out instantly. It also gives the time that the family needs to process their loss and doesn’t put the burden of immediately figuring out how to meet financial obligations.
By investing in a ULIP policy for 10 years, you can enjoy high market-linked returns, a life insurance cover, tax benefits, and the flexibility of fund switching and premium redirection. Hence, a ULIP policy is an effective wealth creation tool.
Before you invest in a ULIP policy, make sure to do your research. Different insurance companies offer different types of features and benefits, so do look beyond just the premium of the policy. Some insurers may offer loyalty additions and fund booster benefits. For instance, as a reward for staying invested for a longer period, some insurers may return the mortality charges.