Over the years, ULIPs (Unit Linked Insurance Plans) have emerged as one of the most popular investment options. This is primarily because ULIPs provide dual advantages of insurance and market-linked investments.
The premiums you pay towards your ULIP are invested into market-linked financial instruments of your choice. A portion of these premiums is utilized to provide life coverage to you. The life insurance component helps you secure the financial future of your loved ones when you are not around. The market-linked returns from investments help you create wealth and fulfil your long-term financial goals, such as creating a retirement corpus, paying for your child’s education, buying a house, and more.
ULIP investments come with a lock-in period of 5 years, during which you cannot access your accumulating funds. After this period ends, you are allowed to make partial withdrawals from the corpus. However, experts recommend holding your ULIP investment for the long term, at least 10 years, to maximize ULIP returns , and also enjoy ULIP tax benefits for a longer period. In this article, let us look at why it is in your best interest to stay invested in a ULIP for 10 years or longer.
Wealth generation from ULIP investment in 10 years
As per financial experts, an average ULIP plan produces an annual return of 10-12%, provided you stay invested in the ULIP policy for at least 10 years. This is the prime reason why ULIPs are considered an ideal investment for long-term investors. Investing for a longer tenure, like 10 years, allows your policy to absorb any short-term market losses and produce high returns in the long run. Furthermore, ULIP returns in 10 years or longer benefit from the power of compounding, where the returns from your investments are utilized to produce further returns.
The following table can illustrate the returns you can expect from a ULIP investment in 10 years, assuming that you invest ₹50,000 annually and generate 8% returns on your investment.
As you can gauge, against a total investment of ₹5 lacs in 10 years, the estimated returns (@8% P.A.) would be ₹7.82 lacs. Of course, if the markets perform well and the funds are managed correctly, then the potential returns could be even more. Vice versa, one must also account that if the market does not perform well, the returns might also go down.
On average, the returns from a ULIP plan are significantly higher than other long-term investment options like National Savings Certificate (NSC), Public Provident Fund (PPF), etc. Even though these schemes are backed by the government, they offer basic returns maximum of up to 7% with no insurance protection.
Alternatively, ULIP investments generate comparatively higher market-linked returns and also provide comprehensive insurance cover for your family in the case of your untimely demise during the ULIP policy tenure.
Further, a 10-year-long ULIP scheme will likely produce higher returns than other market-linked instruments, such as Equity Linked Savings Scheme (ELSS), tax-saving mutual funds, etc. The returns offered by these investments are high but not sufficient to beat the sharply rising inflation in the long run. However, ULIP investments have the power to outpace inflation if invested for a minimum tenure of 10 years.
Benefits of ULIP investment for wealth generation in 10 years
A smart ULIP plan has the potential to create a significantly large corpus for you in 10 years. Some of the features and benefits of ULIP investments that contribute towards wealth generation are:
- Market-linked Returns:
A ULIP plan is an ideal opportunity to earn market-linked returns. A part of the premiums you pay for the ULIP policy is invested in market funds as per your choice. There is a diverse pool of funds you can choose from, which can be categorized into equity, debt, and balanced funds. All these funds have varying degrees of risk associated with them to cater to investors of all types. The potential for returns is proportional to the risk associated.
You can choose the investments as per your risk appetite, time horizon, and financial goals. For example, if you are a risk-averse investor and wish to save for your retirement, you can invest more in debt funds and less in equity-based funds.
However, if you want to buy a house and want high ULIP policy returns over the long term, you should invest more in equity-based funds and less in debt funds. The allocation structure of your ULIP investment portfolio in terms of equity and debt will determine your returns. As an investor, keep a tab on the ULIP returns over the years to know if your 10-year financial target is achievable. Alternatively, if you wish to be less vigilant regarding your fund, some insurance providers also give you the option of leaving the management of your fund up to the company, where experienced fund managers make sure that your funds are optimized in a way to maximize returns while mitigating market risks skillfully.
- Fund Switching
The fund-switching option is the highlight of a ULIP plan. ULIP investments allow you to change your fund allocation (alter the equity and debt proportion in your funds) as per your risk tolerance and market movement.
In the 10-year investment horizon, you can exercise the fund switching option to tap high returns by investing more in equity funds when the market is soaring high. You can also change your fund allocation to become more debt-focused if the market experiences a downturn. This allows you to garner more returns and minimize your losses. You can also change your funds as per your risk tolerance, life stage, and financial objectives.
Moreover, if you witness that a particular ULIP fund is not performing well, you can easily switch your allocation to become more profitable. Most ULIP plans allow free fund switching. However, some insurance companies do charge for this feature beyond a specific limit.
- Tax Savings
When you invest in a ULIP policy, in addition to the savings and insurance benefits, you get ULIP tax benefits on the premiums paid, the maturity amount, as well as the death benefit. The annual premiums you pay for your tax-saving ULIPs are tax-deductible (up to ₹1.5 lacs) under Section 80C of the Income Tax Act, 1961.
Moreover, the maturity proceeds from your tax-saving ULIPs also qualify for tax exemption under Section 10(10D), provided they meet specific criteria. Note that for this exemption to be applicable, the total premiums of all your ULIP policies should not exceed ₹2.5 lacs in a year. If the premiums exceed this limit, then the maturity proceeds will be taxed as long-term capital gains.
Further, the death benefit received by your family in the case of your unfortunate demise during the ULIP insurance tenure is also free from tax deduction under Section 10(10D).
- Life Insurance Protection
One significant benefit of ULIPs is the life cover that is provided to you. Just like a term plan, you are insured for a sum assured for the entire duration of the policy. If you meet an untimely demise, then your family gets the sum assured or the fund value, whichever is higher. Alternatively, they can also get both if that is the type of ULIP you have opted for. Your family can use that death benefit payment to sustain their living expenses and achieve their financial goals, such as paying home loan EMIs, a child’s education or marriage, etc.
As ULIPs give dual benefits of insurance and investment, you do not have to invest separately in an insurance policy. With the same premiums payable, you get protection for your family as well as wealth-creation opportunity.
ULIP plans are also highly flexible. You can choose your funds from a wide range of options. You have the freedom to select your premium paying term, premium mode, and ULIP plan tenure. This allows you to fund your ULIP insurance plan in a way that does not stress your finances.
Given the uncertainty and the rising cost of living today, dual benefit plans, like a ULIP scheme, that enable wealth creation as well as insurance protection, are an ideal investment choice. However, before choosing your ULIP, conduct a thorough ULIP analysis and invest in the best ULIP plan as per your needs. Understanding your risk appetite, your life goals and the investment horizon can make it easy to select the right ULIP plan with an investment strategy that is suited to you.
Edelweiss Tokio Life Insurance ULIP Plan offers a range of features that help you with efficient wealth generation and protect you with life cover. Invest in the ULIP policy from Edelweiss Tokio Life to get attractive returns, competitive features, tax benefits, free-fund switching options, and much more.
Siddhant Dubey - Writer & Photographer
Siddhant works as a freelance content writer who is interested in a wide range of spheres from photography and personal finance to cooking. He is also an aspiring photographer striving to showcase life around him through his vision.