Life insurance is vital to create financial security for your loved ones in your absence. It acts as an alternate source of income from which your family can fulfil their needs. Also, in case of your sudden demise, life insurance ensures that your outstanding liabilities do not burden your family.
It is clear that a sufficient cover is needed to take care of your needs and liabilities. However, buying traditional life insurance can occupy most of your funds, leading to a reduction in funds available for investments. Instead, you can buy a plan that provides life insurance along with a component of investment, too. A Unit Linked Insurance Plan (ULIP) provides both in a single plan.
ULIP is a two-in-one product that offers life insurance and investment. When you purchase a ULIP, the premiums you pay are partly used for providing life cover and partly invested as per your allocation. Based on your risk appetite, you can decide where you want to allocate your funds. ULIP is a perfect product for those who want to create long-term wealth while having a life cover alongside.
Four things to consider before buying a ULIP
It is important to know the components of a financial product before investing in it. It ensures that you make an informed decision, causing no confusion or worry. Here are some things to consider before you buy a ULIP:
Returns on investment
The returns your ULIP generate depend upon the funds you have invested in. One benefit of investing in a ULIP is that you can choose your fund allocation. Based on your risk appetite, you can invest in equity, debt, or balanced funds. If you want to take a risk, you can invest in equity funds that offer high returns for the high risk. There are debt funds that offer low risk but are safer than equity. You can also invest in moderate funds that have a combination of both equity and debt. You can generate good returns if you stay invested for the long haul. Compare different plans and use a ULIP calculator before narrowing down your investments.
Switch funds anytime
Individuals who usually use traditional investment instruments like Fixed Deposits (FDs) may hesitate to invest in a ULIP. However, a benefit of investing in a ULIP is that not only do you choose your fund allocation, but you can also change your fund allocation anytime you want. When you buy a ULIP at a young age, you can take high risks and can simply invest in equity funds. However, as you are entering your 30s and have a responsibility towards your family, your risk appetite might reduce. In a ULIP, you can simply switch your allocation from debt funds to equity funds. You can use a ULIP calculator to allocate your fund based on your goals. This feature of switching funds is a rare feature that a ULIP offers, which comes in handy for investors
Provides urgent funds
Whenever you are building a portfolio, you need to choose some investments that offer liquidity during emergencies. ULIP as an investment is quite flexible, as you can access your fund allocation anytime you want. When you urgently need funds, you can simply withdraw money from the fund value of your ULIP. This can happen provided that you are withdrawing after the lock-in period, which is of 5 years. There are no charges levied for partial withdrawals after the lock-in period; you can simply withdraw for free.
You can avail multiple tax benefits by buying a ULIP. The ULIP premiums are exempt from taxes under section 80C of the Income Tax Act. This makes it an excellent investment in terms of tax savings. Also, on the maturity of your ULIP, the sum you receive has tax exemptions provided certain conditions are met. In case you suddenly lose your life during the duration of your policy, your nominee will receive a sum assured, which is also exempt from taxes.
ULIPs help in inculcating the habit of saving, thus, benefiting your long-term financial goals. Also, the charges that are levied on your ULIP were high when the plan was initially launched. Over the years, these charges have become nominal and most of them have been erased. This has made ULIP a cost-effective purchase.