How ULIPs solve 2 problems at once – insurance and investment

January 30, 2020
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Craig Fischer
Posted in Finance
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The insurance sector has massively penetrated in India. As the insurance industry flourishes further, you can expect a rise in the insurance products in the market. According to a report by Business Wire, you can find a total number of 300 million policies in India. As a buyer, you can pick from the diverse range of insurance options; you should select a Unit Linked Insurance Plan (ULIP) due to its dual-benefit feature.

Before you invest in a ULIP plan, let’s understand what a ULIP plan is in detail to make informed decisions at the time of purchase:

What is ULIP Plan?

A ULIP plan is a mix of investment and insurance under a single integrated plan. While the insurance component can secure your family financially, the investment element can let you diversify your financial portfolio based on your risk tolerance. Due to the dual-benefit of a ULIP plan, it can become easier for you in managing the financial needs of your family while actively participating in the capital markets.

Although you can obtain the benefits of the two, ULIP insurance and ULIP investment are different from each other. Since insurance and investment are two broad concepts of a ULIP policy, you should separately understand how both these components of a ULIP policy work together:

Component 1: Insurance

The primary reason for insurance can be to offer financial security in times of need. During an unfortunate event like death within the family, a ULIP policy can offer a monetary payout to ensure your family’s financial sustenance in the long run in your absence. The money received after your demise is known as the death benefit, which can allow your loved ones to decide when they wish to obtain it. Typically, your family can choose to receive the payout as a monthly income or as a lump-sum amount.

When you purchase a ULIP plan, you should pay the premiums regularly in return for the life coverage. However, you can decide the premium payment term based on your convenience and the current financial condition. As a policyholder, you can be eligible to pay your premium annually, half-yearly, quarterly, or monthly. If it is difficult for you to pay the premium due to loss of income, physical ability, or critical illness, your insurer can provide you with a grace period (30 days) to pay the unpaid amount. Failure to pay the premium amount within the grace period can lead to the lapse of your on-going ULIP policy.

The ULIP insurance can be eligible for tax deductions that can allow you to reduce your tax liability. Let’s go through the following tax exemptions available on a ULIP policy in accordance with Section 80C and Section 10(10D) of the Income Tax Act, 1961. ULIP tax benefits are as follows –

Premium

As per Section 80C, you can be eligible to claim a deduction up to Rs. 1,50,000 on your taxable income.

Maturity proceeds

The maturity proceeds that you receive on the maturity date of your ULIP policy can be tax-free according to Section 10(10D).

Component 2: Investment

Although investing can be one of the most feared parts of your financial planning, it can allow you in growing your hard-earned savings. A ULIP plan can allow the growth of wealth as well as receive relatively high returns on investments. As a policyholder, you should park your money under ULIP policy at a young age since the chances of the growth of funds can be high. When you are young, you have more time in your hands to build a substantial corpus for the future.

A ULIP plan is a flexible investment option. When you choose a ULIP plan, your insurer can allow you to select the type of funds based on your risk appetite. As a policyholder, you can pick the following types of funds mentioned below:

Equity funds

You can invest in equity funds if you can bear the market risks. When you opt for equity funds, you can receive high returns when the market is doing well. Moreover, your returns can be based on the performance of the market.

Debt funds

You can choose debt funds if you are unable to manage the risks of the market. However, debt funds can offer relatively low returns than equity funds.

Under a ULIP plan, you can select the switching option to secure your invested capital from the market volatility. When you avail the switching feature, you can switch from equity funds to debt funds based on the market fluctuations.

In a nutshell, a ULIP plan has attracted a lot of investors due to its dual benefits, affordability, flexibility, and so on. Although a ULIP plan can offer many benefits, you should compare multiple options in the market, consider your financial needs, and choose the right ULIP plan. Moreover, you should pick a reputable insurance provider to receive high coverage at an affordable rate.