Unit Linked Insurance Plan (ULIP) is a financial product that meets the dual needs of the buyer. It provides life insurance and investment in a single plan. It has recently gained popularity even though the product has existed for decades. The more people understood about ULIP, the more they understood how the policy works and its benefits.
What is a ULIP policy? It is a policy that offers life insurance and investment in a single plan. When you buy one, your loved ones are secured with the life cover, and the investment returns allow you to generate wealth. Once you understand what a ULIP offers as a policy, read further to know how it works.
Enables wealth generation
ULIPs are created for the long haul, and those who stay invested in them for the long haul achieve high returns. You can choose from different ULIPs based on your risk appetite. With these high returns, ULIP benefits you by allowing you to achieve your long-term goals. Whether buying a house, your child’s education, or simply for your future, you can use the wealth earned from this policy to fulfill your goals. The significant returns that it provides make it a fruitful investment for the long haul.
Allows you to switch funds
You can choose the fund allocation of your ULIP based on your risk appetite. The funds available can be broadly categorized into three types: equity, debt, and balance. Equity funds offer high returns since the money is invested in equity, but the risk involved is high, too. If you want low-risk funds, you can invest in debt funds. You can invest in a balanced fund if you balance the risk and reward. ULIP allows you to switch your fund allocation if you are unhappy with it. You can switch from debt to equity or vice versa during the policy.
Secures you and your loved ones
ULIP benefits mainly include providing financial cover to the policyholder. The insurance quotient ensures that your nominee will receive a sum assured in case of sudden demise. It gives the financial blanket your loved ones need in your absence. Ensure that you choose sufficient coverage so your family can fulfill their needs and repay any liabilities you may have.
Multiply returns with compounding
When you buy a ULIP, you make recurring investments. Designed for the long haul, your returns will multiply if you hold them for years. Along with the returns that you earn from your investments, you also get the benefit of compounding. Compounding multiplies your returns over the years with no additional effort. Over the years, you will earn interest not only on your principal amount but also on previous years’ returns.
Tax benefits on multiple levels
The structure of ULIP is such that an investor receives several tax benefits from it. Under Section 80C of the Income Tax Act, you can claim a deduction on the premiums you pay toward your plan. The exemption limit under this section is Rs 1,50,000 annually. Also, the maturity amount you receive when the tenure of your ULIP ends is subject to tax exemptions. In case of your unfortunate demise during the policy, the sum assured received by your policyholder is exempt from taxes under Section 10 (10D) of the Income Tax Act.
Offers free partial withdrawals
Unlike traditional insurance, where you have to pay charges for withdrawal or dissolve your investment completely, a ULIP is quite flexible. ULIPs have a lock-in period of 5 years. After that, you can choose partial withdrawals anytime you want. Free partial withdrawals are helpful when you are in urgent need of funds. In case of emergencies, you know you can access these funds.
The above distinct features of ULIP have led to its popularity amongst people. When buying one, ensure that you do so from a reputed company. Also, compare the options available and choose the one that fits your needs.