Life insurance is essential, as it acts as a financial shield for your loved ones in your absence. However, a sufficient cover may cost a high premium and make it difficult to invest in other instruments. Here is where one can opt for a Unit-linked Insurance Plan (ULIP). ULIP is a smart alternative as your money is partly invested in funds and partly used to provide you with a life cover. With the help of a ULIP, you can generate sufficient wealth to achieve your financial goals.
Here is how a ULIP helps individuals for the generation of wealth:
Generates high returns
ULIP offers huge returns when compared to traditional investments like fixed deposits (FDs) or recurring deposits (RDs). With a ULIP, you have the option of investing in the funds of your choice. When you are planning your long-term financial goals, choose funds that align with them. Equity funds have a high-risk factor but also offer high returns. Debt funds are safe to invest in but have low returns. If you are afraid to take risks but are seeking moderate returns, you can simply opt for a balanced fund. In a balanced fund, half of your money is invested in equity funds, and the other half is invested in debt funds. Use a ULIP plan calculator before buying one to ensure that the sum assured is sufficient for your financial goals.
Offers flexibility of switching between investments
Usually, no financial product allows you to change the course of your investment in the middle. However, this is one exceptional feature of a ULIP that enables you to create wealth in the long haul. When you buy a ULIP policy, you can switch between debt funds and equity funds anytime you want. Based on the market, you can make the most of your investment by switching your allocation. Also, as your risk-bearing capacity increases or decreases with time, you can switch your fund allocation too. When you are planning your financial goal, the ability of ULIP to switch between funds is extremely useful.
Tax benefits on premiums
A ULIP is a two-in-one financial product, having the component of both investment and insurance. When you buy a ULIP, the company partially invested the premiums you pay in funds of your choice and partially use it towards providing you with a life cover. The premiums of ULIPs are exempt from taxes according to section 80C of the Income Tax Act. You can get tax benefits of up to Rs. 1,50,000 annually. The tax benefits enable ULIP for wealth generation while also providing you with a life cover.
Tax benefits on maturity
When you are looking for investments in the long run, one major factor you need to consider is the tax implication of those investments. Along with the premiums that you pay for your ULIP, the maturity amount is also exempt from taxes. According to section 10 (10D) of the Income Tax Act, the amount received after the maturity of your ULIP policy is exempt from taxes. Also, the death benefit received in case of the policyholder’s demise is tax-free too. However, the maturity sum is tax-free only when the annual premium is less than 10% of the sum assured for a ULIP bought after the 1st of April 2012. If you had purchased a ULIP before the 1st of April 2012, the annual premium should be less than 20% of the sum assured.
Free partial withdrawals
When in need of funds urgently, if you withdraw from most financial instruments, you either have to pay charges or dissolve the instrument altogether. A ULIP has a lock-in period of 5 years. After those 5 years, you can withdraw money from your ULIP anytime you want. ULIP offers free partial withdrawals after the lock-in period. This is a useful feature, as you can opt for partial withdrawals whenever you need funds urgently.
Inculcates the habit of saving
With responsibilities and liabilities, putting money aside every month towards long-term savings can be difficult. Several individuals prolong investing and cannot achieve their financial goals later. When you buy a ULIP, along with insurance, you also get money saved aside from every premium towards your long-term funds. You can use a ULIP plan calculator to ensure that the maturity amount of your ULIP suffices for your financial objectives.