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ULIPs Can Help You Save For The Long Term, Find Out How

ULIPs Can Help You Save For The Long Term, Find Out How

Many of us are last-minute tax planners. Tax planning is often not part of financial planning at the beginning of the year but a hasty decision towards the end of the year. You might go for loans and investments without putting much thought into them. However, it is important to keep your long term financial goals in mind. One of the popular tax-saving instruments are ULIPs.

What are ULIPs?

A ULIP or a Unit Linked Insurance Plan is an insurance-cum-investment plan. A part of the premium is paid towards a life cover and the other part is invested in funds chosen as per your financial goals and risk appetite. The investment part of a ULIP could be in equity, debt, or balanced schemes. There are multiple ULIP benefits that make them good strategies for the long term.

Lock-in period

ULIPs generally come with a lock-in period of 5 years. This inculcates a habit of saving and investing on a regular basis. The premium payments can be monthly, quarterly, half-yearly, or even yearly, depending on your insurer. Once you sustain it for five years, it becomes easier for you to save, invest and allocate in the later years. You also learn about the market and about which funds could be more profitable.

Dual Benefit

The very essence of a ULIP is that provides you with a life cover along with an investment. Once you make an investment, you can simultaneously work towards your investment goals while securing your family's future. This takes a lot of financial management burden off your shoulders in the long run.

Potential of better returns

Insurance policies are very popular as tax-saving instruments. However, they offer fixed returns and cannot beat inflation. On the other hand, a ULIP invests partly in equity and debt funds. The option of switching investments gives you the flexibility to decide how much of your money is invested in equity at a certain point of time. These features together make for potentially better returns as compared to pure insurance policies.

Flexibility

Since you have the option to choose from multiple fund options, you can calculate and measure risks. The facility to switch between funds also gives added flexibility. Unlike shares, you don't have to constantly keep track of the companies that your fund has invested in. You just need to decide on allocations based on the performance of your fund.

If you are looking for a ULIP with good flexibility, you can check out the Invest 4G plan from Canara HSBC Oriental Bank of Commerce. It offers 7 different funds to choose from and 4 portfolio strategies for investing your money. It also offers the flexibility of switching and redirection of fund options as per changes in your risk preferences.

Tax benefits

One of the main ULIP benefits is that premium payments are tax-deductible under Section 80C of the Income Tax Act. The maturity proceeds are also exempt from tax under Section 10(10D). Moreover, ULIPs are one of the few instruments to not fall under the ambit of the Long Term Capital Gains Tax (LTCG Tax). Fund switches and partial withdrawals, too, are tax-free. Thus, a ULIP makes for an excellent tax saving device in the long-term.

Partial withdrawals

Once your lock-in period of 5 years is over, you can make partial withdrawals. This allows you the leeway of using a part of your investment for emergency financial needs while also continuing with your long-term goals.

Top-ups

When you have a surplus of savings that you want to invest, you can opt for a ULIP top-up instead of a new investment altogether. Top-ups are usually charged at just 1%-2%, which will generally be lower than the regular premium cost. Thus your average cost becomes lesser. A top-up will cost you less and increase your investment and potential returns while also increasing your life cover.

It is always a good time to invest in a ULIP. If you haven't invested yet, you might want to check out the Invest4G plan from Canara HSBC Oriental Bank of Commerce. It offers the option of a return of mortality charge. Other benefits include loyalty additions and wealth boosters.

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Annual Income (In Lacs)

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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