Most of the financial advice doled out to us by well-meaning parents, relatives, or friends are primarily risk-averse options— Bank FDs, PPF, NPS, post office savings schemes or traditional insurance products. Barring a few who mention mutual funds or equities, most of the advice is risk-averse in nature. Therefore, it should not come as a surprise if someone says that Indians are conservative investors.
Conservative tax saving instruments offer returns which cannot beat inflation and insurance products offer zero to little avenues for wealth creation. Mutual Funds may offer higher returns and limited tax benefits but offer zero life protection. ULIPs, on the other hand, are a financial product which bridges the gap between investment and protection with excellent tax saving options.
While their journey has not been a smooth one, Unit Linked Insurance Plans remain as one of the best financial products to realise your long-term investment and insurance goals.
Below are a few reasons why ULIPs are popular among Indians.
- You choose the risk appetite
ULIPs invest a portion of your money across investment channels such as equities, debt instruments, and money market instruments.
Here you have the option to choose the asset class to invest in. A young individual with an aggressive streak can choose to invest primarily in equities while a risk-averse individual may choose a combination of debt and equity to gain high returns at minimal risk.
- You can change your mind
An investor can switch from one asset class to another or change the investment ratio while keeping market trends in mind.
If a majority of your allocation is in debt instruments, you can change the percentage and allocate some portion into equities because the markets are seeing an upswing. The same goes for recessionary periods where you can remove all investments from equities and allocate them into safer assets such as debt and money market instruments.
This is where ULIPs score over mutual funds. With a pre-determined allocation strategy, mutual funds limit the flexibility to change your investments.
- Significant tax benefits
One of the most popular benefits Unit Linked Insurance Plans offer is tax savings. There are benefits on investments as well as withdrawals.
The premium you pay towards this plan can be claimed as deductions u/s 80C of the Income Tax Act. However, there is a permissible limit which as of now is INR 1.5 lakh.
There are three withdrawal methods in this plan.
- In the case of your death, a death benefit is paid which is tax-free.
- Upon the plan’s maturity, you receive either the assured benefit or the value of the unit-linked investments (whichever is higher). It is exempted from tax under u/s 10(10D) of the Income Tax Act.
- Once the lock-in period of five years is over, you can make partial withdrawals which cannot exceed 20% of the fund value. The withdrawals are tax-free.
- You can top-up your plan
You can top-up your Unit Linked Insurance Plan. They are additional amounts you can invest over the existing premium that you pay to take advantage of a well-performing plan. Premium allocation charges of a top-up can vary from one to three percent. The top-ups are eligible for deductions u/s 80C of the income tax Act only if the aggregate premium does not exceed 10% of the sum assured.
- Long-term in nature
When it comes to long-term financial planning, this product is one of the best. With a lock-in period of five years, you can plan to use the returns to meet important goals such as a foreign education, marriage or real estate purchase.
Once the lock-in period is over, you can make partial withdrawals from the fund. The withdrawals will come in handy to meet goals and once the plan matures, you can use the huge sum paid to you in order to meet long-term goals and lead a happy life.
If you are looking for a financial product to realise long-term wealth goals as well as a life cover, look nowhere else but a Unit Linked Insurance Plan.