People are mainly concerned with accomplishing three major goals in their financial planning. The first is to protect their loved ones’ futures, the second is to safeguard their children’s education, and the third is to create returns on the money they make.

 

What if you could achieve all three of these financial goals with a single investment vehicle?

 

Unit-linked insurance plans (ULIP plans) are a hybrid investment vehicle that many investors feel offers the best of both worlds. A ULIP planis a hybrid of insurance and investing. Depending on the policy, you can opt to pay the premium in a single lump payment, monthly, or even annually.

What is ULIP?

 

A ULIP plan, or Unit Linked Insurance Plan, is a unique and creative market-linked policy that combines the best of both investing and life insurance advantages. In layman’s words, a ULIP is a single integrated plan that allows you to reap the benefits of both investing in market instruments such as stocks, bonds, and funds (equity, debt, or both) and protecting your future with a life insurance risk cover.

 

Insurance firms first offered ULIPs in 2005, allowing policyholders who wished to take on high-risk investments to obtain a greater return on their investment.

 

How do ULIPs work?

 

Your premium for unit-linked insurance products is largely divided into two components. One portion of your premium is used to cover your insurance, while the remainder is used as a common pool for investment in market instruments such as stocks, bonds, or funds.

 

Fund investments might be either all-equity, all-debt, or a combination of the two. The nicest aspect of the ULIP plan is that the premium may be paid monthly, quarterly, biannually, or annually, depending on your schedule.

 

Unlike endowment plans, which offer low returns with little risk, ULIPs may accommodate investors with varying risk tolerances. Investors with a low-risk tolerance can select ULIP plans that invest in low-risk market securities like Corporate and Government Bonds.

 

Investors with a high-risk tolerance, on the other hand, can participate in ULIP plans that primarily invest in stocks and equity-only funds. A ULIP plan has a 5-year lock-in term. However, if you want to maximise your returns, it is best to stay invested for a longer period to average out market swings.

 

5 Benefits of Investing in ULIP Plans

 

Here are the major benefits offered by ULIP plans:

 

1. Freedom to choose your Life Cover

 

You can select the quantity of Life Coverage that you desire in Unit Linked Insurance Policies. The minimum Life Coverage granted by most ULIPs is 10 times your yearly premium amount.

 

However, depending on the policy and the insurance company, you may choose a Life Coverage amount that is up to 40 times your yearly premium or even more.

 

2. Freedom to choose your investment type

 

There are two fundamental types of funds: equity funds and debt funds, as well as a hybrid of the two known as balanced funds. Equity funds encompass investments such as the purchase of stock in corporations. Debt funds are funds that invest in debt instruments. Balanced funds invest in both equities and debt funds in equal quantities.

 

ULIP plans allow you to invest in a variety of funds based on your investment objectives and risk tolerance. For example, if you want to increase your wealth and are willing to take a risk with your investment, you can invest in equity funds. Similarly, if you want to earn consistent returns on your investment, you may put your money into debt funds.

 

You may also switch your money between equity and debt funds utilising the switch option. Most insurance policies include a set number of free switches each year, with a nominal price for additional switches.

 

3. Liquidity

 

Unit Linked Insurance Policies also provide a partial withdrawal+ option, which allows you to remove a portion of the money invested in your policy.

 

This option allows you to pay for quick needs such as your child’s 10th, 12th, or graduation fees, a family trip, in case of an emergency, and more. Partial withdrawals are often free of charge.

4. Goal-based planning

ULIP plans are designed to assist you in achieving your major objectives, such as the potential for wealth growth, retirement planning, or saving for your child’s education. ULIP plans also provide the added benefit of knowing that your premium is contributing to the achievement of your long-term objectives.

 

<h3>5. Tax benefit</h3>

By investing in a ULIP plan, you can save tax on your hard-earned money under the Income Tax Act of 1961. You can obtain a tax break at various phases of your life insurance coverage.

 

Stage 1: Entry Advantage – Sections 80C allow you to deduct your premium payments from your taxable income.

 

Stage 2: Exclusive Switching Advantage – You may make debt-to-equity swaps that are fully tax-free.

 

Stage 3: Exit Advantage – You also receive a tax-free Maturity Benefit#, subject to Section 10 criteria (10D).

 

How to choose the right ULIP Plan?

 

Aside from the trailing returns and the Net Asset Value (NAV), potential investors must rely on the advice of their distributors when deciding which ULIP plan to invest in.

 

Depending on the policy’s duration, an investor accumulates units, which effectively represent an investment in either equity, debt-only, or hybrid market instruments. Long-term ULIP plan holders might choose an equity-oriented fund that is favourable to growth.

 

This is mostly due to the long-term averaging of market swings. The premium rates for Unit Linked Insurance Plans have recently been decreased greatly, and it has been discovered that returns can be quadrupled if one invests in equity funds. The following are the essential variables to consider while selecting a ULIP plan: –

 

• Personal financial objectives — From supporting your child’s education to retirement planning, a ULIP plan may assist you in meeting your long-term financial objectives.
• Compare ULIP options – ULIP plans must be compared based on crucial aspects such as previous performance, asset allocation, premium payments, and so on.
• Investment Horizon – Make certain that the investment duration for your chosen ULIP plan corresponds to your long-term financial objectives.
• Option to Rebalance Asset Allocation – Check to see whether your ULIP plan has automatic rebalancing asset allocation, which allows you to choose between funds based on your risk tolerance and life stage.

 

Wrapping It Up

 

ULIP plans are a terrific method to not only fulfil your financial objectives but also to preserve the future of your loved ones. As a result, it is a symbiotic relationship of insuring and investing your hard-earned money in the greatest way possible.