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5 reasons you should invest in ULIPs right away!

5 reasons you should invest in ULIPs right away!

reasons to invest in ULIP

Do you often find yourself scrambling through the internet looking to invest money so that you can save some tax in this financial year? If yes, it is likely that you’ll end up making hasty decisions and in just a few years you will also feel that most of these investments are not useful enough for you.

Tax saving investments often has a long lock-in period, during which you cannot withdraw any money from the investments. That is why a little planning is necessary when you want to invest for tax-saving.

But, often you are stuck with urgent timelines of showing your investment proof and need a quick investment option which you may not regret later. Unit linked insurance plan or ULIP is one such investment where you may invest first and seek goals later, although you should prefer to plan your goals first and invest later.

Benefits of ULIPs

Here’s what makes ULIPs unique and un-regrettable for quick tax-saving decisions:

1. Long-Term Investment

ULIPs fulfil your tax-saving need for more than one year. So, even though, you had to make a quick decision this year, next year you can simply continue the same plan.

2. Highly Customizable

ULIPs are highly customizable even after you have started investing in the plan. You can change the portfolio strategy, allocation, and even transfer funds to a different fund option within the ULIP.

Although ULIPs have multiple asset allocation strategies you can use, you always have control over your portfolio. Once you decide to allocate the ULIP investment to one of your financial goals, you can readjust the fund allocation to minimise risk.

You would want to assign your ULIP investments to long-term goals only, as ULIPs tend to do far better over long periods.

3. Enhances Your Life Cover

As ULIPs are life insurance plans, they always have a life cover associated with them. Thus, every time you invest in a ULIP, you also enhance your family’s financial security.

Apart from enhanced life cover, ULIPs can also provide protection for your financial goal. For example, if you are using ULIP plan to save for the higher-education goal of your child, you have the option to ensure that your child receives the money as intended even if you are not there anymore.

The insurer pays your family the life cover amount but continues to invest as you would have done. Your child will receive the accumulated fund value at the intended maturity of the policy.

4. Tax-Free Returns

While the tax saving on your investment in ULIP plans is limited to the 80C limits, you can invest any amount in the ULIPs. Even if your annual ULIP investments exceed the 80C limits the maturity value you receive can still be completely tax-free.

To ensure that your maturity proceeds do not attract tax all you need to do is invest only up to 10% of the policy sum assured in any policy year.

For example, if you start investing in a ULIP plan with a life cover of Rs. 20 lakh, you can deposit a maximum of Rs 2 lakhs in a year and stay untouched by the tax.

Therefore, you can use ULIPs to accumulate huge tax-free wealth as well.

5. Adjust Investment Amount Later

With the 10% rule of taxation, you can increase or decrease your investment amount in ULIP later. You should anyway, keep the scope open for investing a higher sum in the ULIP plan when buying without a long-term goal.

Income growth is highly likely for you, especially when you start investing early. Keeping your sum assured high will save you from the efforts of buying a new ULIP plan when your income grows,

For example, if you are 30 years of age and can invest Rs. 1 lakh a year into ULIP, you can opt for a sum assured of Rs. 15 lakhs. Thus, in future, if you want to increase your annual investment your ULIP investment will not become taxable.

Plan Goals Before Saving Tax

You can use every tax saving investment for a specific purpose and that is how you can make them useful again. For this article, we will focus on unit-linked insurance plans or ULIP investments.

ULIPs being a long-term investment commitment may quickly start to bore you into making an irrational decision. This happens only because you may not have had a clear goal in mind except that of saving taxes when you bought the ULIP plan.

However, it does not mean you cannot plan and use existing ULIP for the same afterwards.

Speak to an insurance specialist now!

FAQs

In order to understand ULIP NAV, you first need to understand how ULIPs work. In ULIPs, a portion of premium from different investors is accumulated to create one investment corpus. This money is invested in several different market instruments. So to divide the returns properly among all the investors, the fund manager divides the net asset value in to small units with a specific face value. NAV is the per market share value of a fund. To better understand the definition of NAV, take a look at the formula below -

Net Asset Value = [Assets-(Liabilities + Expenses)] / Outstanding Units

It's not risky to invest in ULIP if you chose a safer path. Risk factor in ULIPs depends on the investment option you choose. If you are not okay with sharp movements, then choosing a low risk investment is a better idea. For people with high risk appetite, it's good to choose equity funds while risk-averse investors can go for debt funds.

You can opt for settlement option if you want to take your fund value in periodic installments. With the settlement option, you can get your maturity amount in installment as per the frequency chosen by you over a maximum period of 5 years. You can choose complete withdrawal of fund value at any point of time. Although, you will not get any life cover during this period.

ULIPs are life insurance products that provide paths to invest. And just like other investment option, there's no guaranteed investment return in a ULIP. Although, if you like taking risks and want to earn more returns on your investment, then opt for equity funds.

At the time of maturity of ULIP policy, you will get the fund value on your prevailing NAV. Fund value is the number of units of policy multiplied by NAV (net asset value).

Value of the fund = Total units of policy x NAV (Net Asset Value)

Well, discontinuing your premium payment will disrupt your savings as well as financial goals. In such case, you can approach your insurance company and ask for the revival of discontinued policy within the stipulated timelines. Also, you will have to pay all the unpaid premiums.

ULIP plan is a combination of investment and insurance. Thus, one must hold this plan for a duration of at least 10 years so as to get investment benefits out of it. As an early exit will have its own consequences. ULIPs have a lock-in-period of 5 years. Thus, you may surrender your policy before the completion of 5 years, but you will be paid only after the end of 5 years.

Generally, minimum lock-in period for ULIP is 5 consecutive policy years. During this time period, if the policyholder discontinues or surrenders the policy, then he/she will not able to receive any payouts. Withdrawals are only allowed at the end of the lock-in period. In addition to this, if you surrender your policy before the lock-in period ends, then you will have to pay surrender charges as well. Also, it is advisable not to exit your plan after the completion of 5 years of lock-in period, because if you stay invested for a longer duration it will help you reap better benefits.

The amount that you pay towards the Unit Linked Insurance Policy is eligible for tax deduction as per Section 80C of the Income Tax Act, 1961. This means that the premium amount paid will be deducted under section 80C from your taxable income up to a maximum limit, which is currently ₹1.5 Lakhs. However, the aggregate amount of deductions under section 80C, section 80CCC and 80CCD (1) shall not, in any case, exceed ₹1.5 Lakhs. Also, upon the maturity of the policy, the payout amount you receive will be exempt from income tax, subject to the applicable provisions of Section 10(10D) of the Income Tax Act, 1961.

Here’re the following major benefits of buying ULIP

1. Tax Benefits – It helps you to reduce tax liabilities. This means you are liable to enjoy tax benefits on the premiums paid towards the policy as per Section 80C of the Income Tax Act.

2. Long-term growth– One of the major benefits of buying a ULIP plan is that it offers long-term benefits. ULIPs come with a lock-in period of 5 years which will keep you invested for a longer period.

3. Dual benefits – ULIPs not only offer life coverage but also come with a wide range of investment funds that will help you earn great returns. This includes balanced funds, debt funds or equity funds. You can invest in any of them depending on your need and risk appetite.

4. Flexibility – It gives you the flexibility to switch between funds basis your risk appetite. You could select multiple funds and different investment strategies.

5. Partial withdrawal option – It allows you to make partial withdrawal in case of any uncalled medical emergency or contingency after completion of lock-in period.

ULIP is a perfect investment option if you are looking for long term wealth creation. It could be buying your own house, a new car, going on a long vacation, or your child’s higher education or marriage, ULIP helps you to meet all your long-term financial goals. Moreover, it comes with a lock-in period of 5 years which keep you invested for a longer period and helps you earn better returns. The lock-in period is calculated from the date when the policy is issued.

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