People are always thinking of ways that can help them earn extra income to achieve their financial goals. Some people work overtime, take up a part-time job along with their full-time employment, and become cautious about spending money, while others work smartly and invest their hard-earned money in instruments that can generate wealth.
Unit-Linked Insurance Plan (ULIP) is a financial tool that can aid investors to accomplish their life goals by providing higher returns on their investments. If you wish to get an idea of what is ULIP plan along with its features and benefits, read on.
ULIP is a form of insurance policy that provides life cover and helps policyholders in growing their wealth over time. In short, ULIP offers the components of life insurance and investment in one policy. Now that you know what is a ULIP plan, its functioning and plus points are explained ahead.
How does ULIP work?
Part of your premium gets deducted under various ULIP charges, whereas the remaining sum is invested in multiple market-linked fund options. Here, you have the choice of determining the percentage sum that you intend to invest in equity or debt fund as per your risk tolerance. ULIP comes with a compulsory five-year lock-in period. If you want to make the most out of your investment, remain invested for a long tenure of 10-15 years.
If you are skeptical about “why should I invest in ULIP”’, here are the advantages of this policy.
- Flexibility of switching funds
One of the best features of ULIP is that you can switch from one fund to another based on how the market is faring. The ULIP performance is entirely dependent on the market movement. The Net Asset Value (NAV) of your ULIP will increase if the market is bullish. Conversely, the NAV will decrease if the market is not performing well. You can transfer your investment from debt to equity funds when the market is at its peak to maximize your returns. Similarly, you can move your money from equity to debt funds when the market is bearish, to safeguard your accumulated wealth. Therefore, you can have better control over your investments.
- Life cover
ULIPs is a life insurance product with an investment component. By investing in a ULIP, you are securing the economic well-being of your loved ones in case of your unfortunate absence.
- Tax benefits
ULIP offers multiple tax exemptions. You can claim a deduction of up to INR 1.5 lakh per year for the premium paid towards the ULIP as per Section 80C of the Income Tax Act, 1961. Additionally, the death and maturity benefits are tax-free according to Section 10 (10D) of the Act.
- Power of compounding
Your funds can grow if you stay invested in ULIP for the long term. You can reap the benefits of compounding and maximize the returns on investment. With this, you can fulfill your financial goals of buying a new house, funding children’s education, and sponsoring their wedding, among other objectives.
- Partial withdrawal
You can partially withdraw your funds to meet urgent monetary needs after completing the mandatory lock-in period of five years.
Now when you know what is ULIP, it is advisable to invest in an ideal one as soon as possible. It will be wise to start early and stay invested with a long-term perspective to build a large corpus. With time, your funds grow substantially, as the ULIP performance is promising during a long tenure. This helps you in achieving your life goals in the long run.