With life’s unpredictability in the current times, financial planning is essential. Whether it is securing your family or creating financial assets to achieve goals in life, a comprehensive financial plan needs to be put into place. While there are numerous financial avenues that you can opt for while planning your finances, one of the most reliable and well-known financial instruments is a unit linked insurance plan, also commonly known as ULIP.
What Is A ULIP?
A unit linked insurance plan or a ULIP is a type of life insurance plan that combines the benefits of an insurance plan as well as an investment option in one. The premium paid for a unit linked insurance plan is divided into two parts – one that covers life and one that goes into investment instruments. These dual benefits allow you to secure your family’s future in case of a tragedy and additionally plan for financial goals in the future.
Is Unit Linked Insurance Plan A Good Investment Option?
Like any other savings plan, ULIPs also comes with a host of benefits that help you make a financial sound decision before investing. A unit linked insurance plan offers a dual advantage – a life insurance plan as well as a reliable investment option. But is a unit linked insurance plan a good investment option keeping in mind your future goals? Yes! ULIPs are systematic investment options with multiple benefits which are designed to address key financial goals.
Benefits of Investing in A Unit Linked Life Insurance Plan
Flexibility – A ULIP allows you the flexibility to choose between equity, debt and balanced fund options depending on your financial risk appetite and goals. It also gives you a chance to move your money between these various financial instruments, allowing your money to earn maximum returns.
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Better Returns – Owing to its equity advantage, a unit linked insurance plan is likely to give you better returns than any other savings scheme. Since the maturity amount is tax-free, the tax efficiency of this product makes it a better choice amongst financial instruments.
Long Term Investment – These plans encourage goal-based savings due to its tenure. A ULIP has a lock-in period of 5 years, which allows your money to be invested in a disciplined manner. So, if you are looking to buy a car, invest in a home or provide for your child’s education, this long-term systematic investment option is the best way forward.
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Tax Benefits – Various tax benefits are offered at all stages of the plan.
Taxation Benefits with ULIPs
As far as tax-efficiency goes, a unit linked insurance plan is one of the best savings and life insurance plans. It offers tax benefits at various stages of the plan tenure, allowing your money to reap maximum benefits.
Tax-Free Premiums – Premiums paid for all 5 years for ULIPs are tax-free under Section 80C up to Rs 1.5 lakhs. Compared to other plans that offer tax benefits only on maturity or the year of investment, a unit linked insurance plan is an absolute winner.
Maturity Benefit – All maturity benefits from a ULIP are tax-free under Section 10D of the Income Tax Act, 1961. There is no impact on the long-term capital gains tax on unit linked insurance plans, allowing your tax sheet to remain as is.
How Is ULIP Return Calculated?
Unlike investments in the stock market, like shares, you don’t have to keep a regular check on the companies that the fund invests in. Given that a ULIP utilises various financial instruments like growth, equity, balanced and income funds, here’s how the ULIP return is calculated. There are two ways to calculate the return on investment for ULIPs.
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Absolute Returns – Also known as point-to-point returns, this return on investment method shows you the absolute returns you have made between the point of purchase and current point. Deduct the initial NAV from the current NAV and divide the figure received from the initial NAV and multiply by 100 to obtain the percentage value.
Formula – [(Current NAV- Initial NAV)/ Initial NAV] x 100
Compounded Annual Growth Rate (CAGR) – This method is an indication of the annual growth of an investment over a specific time.
Formula – {[(Current NAV value/ Initial NAV value) ^ (1/ number of years)]-1} *100
Do note that a unit linked life insurance plan has various fees like fund management fees, premium allocation charges, mortality fees and also surrender charges in case of partial or pre-mature encashment of plan.
How Does One Invest in ULIPs?
There are various unit linked insurance plans available in the market that one can invest in. Check for the background expenses, past ULIP performance, maturity benefits, insurance cover, premium plans offered as well as for the additional charges before investing. Along with that, research on funds that the particular ULIP you are looking at invests in, to ascertain the returns from investments. ULIP is an excellent wealth-creating tool for long term benefits that allows you to ride on equity advantage.
