Financial planning is critical in life and when done from an early age, it gives a much-needed head-start. Your financial plan must not only involve cherry-picking investments to meet your financial goals, but also making sure you have the right backup in case things go down south. That’s when a life insurance plan comes to the rescue.
Life insurance plans are essential to provide 360-degree coverage in your financial plan. While there are myriad options, a Unit Linked Insurance Plan or ULIP is what provides the blend of investment and insurance in one instrument. Thus, a ULIP offers the dual benefit of investment and protection.
In understanding ‘what is ULIP’ it is essential to be informed that it involves the investment of a portion of your premium in market-linked securities. Thus, there is an inherent risk right from the start. A key benefit of choosing ULIP over other forms of life insurance plans is that they are flexible and customisable. Here are some of the reasons why one should buy a ULIP. –
- Offers Flexibility
ULIPs are insurance plans whose investment component provides a large degree of flexibility. As a policyholder, you have the option to choose the right set of funds where a portion of the premium is invested. Equity funds, debt funds, and balanced funds are some alternatives which can be selected based on your risk appetite and expectation of returns. Further, ULIP also allows you to switch among these funds which help you maximise your returns and balance the risk.
Along with selecting the right fund for investment, ULIPs also allow you to choose the sum assured of your insurance component at the beginning. In some cases, insurance companies also allow increasing the sum assured during the policy tenure.
The flexibility in ULIP is also available when it comes to increasing the premium. The additional premium can be topped up to invest in the selected fund which helps to maximise the returns from the investment.
Further, riders are also available that can help you seek additional protection for your insurance component of the ULIP. A common rider is the disability benefit rider which covers situations of disability within your policy scope.
- Offers Transparency
When buying a ULIP, the entire transaction is transparent, which helps you know how much charges and fees are paid at each stage. This helps the policyholder to make an informed choice about the particular insurance plan.
This transparency in ULIP is available by way of a benefit illustration. The benefit illustration is what helps you understand how your premium will be allocated between the insurance and the investment component. It also highlights the necessary information for the possible returns based on the investment opted for.
In addition to the benefit illustration, the product brochure is also available, which enlists the key features of a ULIP. A thorough reading of the product brochure will help you know your policy specifics in detail. Once your policy is issued, you also get a key feature document that summarises the features. The product brochure along with the key feature document enables you to get a comprehensive understanding.
The free-look period is another way how a ULIP offers transparency. Here, a 15-day window allows you to cancel your policy if you aren’t satisfied with it. Any premium paid will be refunded in this case after deducting applicable charges.
Lastly, Net Asset Value or NAV is how a ULIP offers transparency to the policyholder. When understanding what a ULIP is and how it can help to maximise your investment and protection objective, selecting the right fund is an important choice. However, monitoring the fund is possible using the NAV. A change in the NAV can help you to gauge the performance of the fund you have invested in.
- Encourages Goal-Based Savings
Using a ULIP plan, you can ensure your financial goals are met while ensuring a financial shield for your family. These financial goals may include buying a house, child’s education, or even planning for your retirement. The different fund options that are available when buying a ULIP ensure that different financial goals can be met thereby ensuring goal-based savings along with protection. A ULIP calculator is a nifty tool that can help you select a fund based on your financial goals.
- Offers Tax Benefits
When you opt for a ULIP, there are several tax benefits at different stages. The premiums for these ULIPs are deductible under Section 80C of the Income Tax Act, whereas the maturity proceeds are exempt under Section 10(10D) subject to certain conditions. While there are two regimes for filing your income tax returns, these tax benefits are available only under the old regime and not the new one.
- Offers Liquidity
Once the 5-year lock-in period in a ULIP ends, you can make use of the partial withdrawal feature. Using this feature, any emergency requirement of funds can be met, thereby offering liquidity with protection and investment. To know how much you can withdraw, a ULIP calculator can help provide you with a reasonable estimate.
