Over the years, ULIPs (United 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 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 schemes have a lock-in period of 5 years.
However, experts recommend holding your ULIP investment for 10 years to get the maximum benefits and also enjoy ULIP tax benefits for a longer period.
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 eventually, produce high returns in the long run.
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 up to 7% with no insurance protection.
Alternatively, ULIP investments generate high market-linked returns and also provide a 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, the 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. You can choose the investments as per your risk appetite, time horizon and financial goals. If you are a risk-averse investor and wish to save for your retirement, you can invest more in equity funds and less in debt-based funds.
However, if you want to buy a house and want high ULIP policy returns, you invest more in equity-based funds and less in debt funds. The compilation of your ULIP investment portfolio in terms of equity and debt will determine your returns. As an investor, it is good for you to keep a tab on the ULIP returns over the years to know if your 10-year financial target is achievable.
- Fund switch option: The fund-switching option is the best 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 over the years.
In the 10-year investment horizon, you can exercise the fund switch option to tap high returns 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 minimise your losses. You can also change your funds as per your risk tolerance 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, you get the savings and insurance benefit along with ULIP tax benefits in the present and the future. The premiums you pay for your tax-saving ULIPs are tax-deductible 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.
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)
- Insurance protection: ULIP plans couple investment with insurance cover. A part of the premiums you pay is invested in market-linked funds, whereas the remainder of your premiums is used to provide you with a secure life insurance cover.
Your family can use that death benefit payment to sustain their living expenses and achieve their financial goals, such as paying home loan EMIs, 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.
- Flexibility: 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.
Edelweiss Tokio Life Insurance ULIP Plan offers a range of features that help you with efficient wealth generation and protect you with the 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.
Aastha Mestry - Portfolio Manager
An Author and a Full-Time Portfolio Manager, Aastha has 6 years of experience working in the Insurance Industry with businesses globally. With a profound interest for travelling, Aastha also loves to blog in her free time.