New to investments? You are not alone; a majority of working professionals across age groups are still newbies with regard to investing for the future. For example, Angel Broking, a renowned securities firm founded in 1987, estimated that 72% of the 510,000 new customers it acquired between October 2020 and December 2020 had never traded stocks before. Furthermore, in the last two years, its user base has grown from 8 million to 31 million users.
Technology has made investing very inclusive. Even people who are not well-versed in financial markets are hopping on the bandwagon and investing in a host of products. One of them is a unit-linked insurance plan (ULIP), a hybrid of life insurance and market-linked investment, that can be a very good value addition to your portfolio, especially if you are a beginner.
While choosing a ULIP plan, you can chalk out an investment strategy and begin your journey towards attaining financial security and freedom in the future. Of course, before you start, you should finalize some core aspects carefully. These include your future financial goals, your monthly/yearly fund allocation for investments, and your risk appetite.
Let us delve deeper into ULIP insurance and see how it can add value to your portfolio.
ULIPs- How do they work?
A unit-linked insurance plan or ULIP is an innovative investment option that gives you the dual advantages of life insurance coverage throughout the policy tenure along with investment options. ULIP plans help you integrate life coverage and wealth creation into a single plan. But how do they essentially work? ULIP investments are made in various market-linked instruments like equity funds, debt funds, or balanced funds. Your premium is deployed for this purpose after deducting applicable charges. The premiums may be paid on a quarterly, monthly, annual, or bi-annual basis, depending on what suits your needs.
A ULIP policy caters to every kind of investor. Let us take an example to understand this statement. If you are risk-averse by nature, then you can choose a higher allocation to debt funds and other low-risk investments. If you have a higher appetite for risks, you may allocate more to equity funds.
These policies come with 5-year lock-in periods during which you cannot access your funds. That being said, ULIPs are meant for long-term investors as they have the potential to produce inflation-beating returns over a longer duration. Now that you have an idea of the basic working of ULIPs, here’s examining their benefits.
Advantages Of Investing In The Best ULIP Plans in India
The best ULIP plans will give you multiple advantages and prove to be worthy of inclusion in your portfolio. Here are some of them:
Robust wealth-generating potential
Staying invested in a ULIP policy for the long haul can do wonders for your wealth-creation targets. You will witness the power of compounding after 10-15 years while market fluctuations are also balanced/averaged out accordingly. These returns have the potential to comfortably surpass inflation while helping you build that nest egg you always wanted for future security and post-retirement expenditure.
Life insurance coverage
If you are a beginner, then a ULIP investment will not only help you build wealth for the future but also keep you insured. Moreover, in case of your untimely demise within the policy period, your nominees will receive a lump sum to help them meet future goals and maintain their living standards.
One of the most significant advantages of ULIP plans is the tax benefits. You can get deductions up to Rs. 1,50,000 on your premium payments under Section 80C of the Income Tax Act. At the same time, Section 10 (10D) exempts the maturity amount that you receive, provided that the annual premium is below Rs. 2.5 lakh. Any claim arising from the policyholder’s death will always be tax-exempted.
Flexibility and Risk Management
Newbie investors can get a feel of the market and counter market risks effectively with ULIPs. Your policy will have a fund-switching feature with a certain number of free switches at intervals. You can not only choose the funds to invest in at the beginning but also periodically switch them as per your changing risk appetite, life goals, and market conditions. In a falling market, you can limit your equity exposure and allocate more to debt funds to safeguard your investments. In a rapidly growing market, you can allocate more to equity funds in order to maximize your investments. Periodic rebalancing of your portfolio helps you diversify your market risks while scaling up the possibilities of higher returns at the same time.
These are some of the biggest benefits you can gain by investing in a ULIP policy. However, there are a few things that you should always keep in mind before choosing a ULIP.
- Be clear about your future financial goals, right from the higher education of your children to your retirement, buying a house, and so on.
- Always examine ULIP features minutely, keeping an eye on the terms and conditions.
- Check the funds carefully and the overall track record of the scheme, including past performance, allocation ratio, and other aspects.
- Ensure you can invest long-term and in sync with your financial goals. Your policy should give you the option to rebalance your portfolio or switch funds as well.
- Also, keep an eye on the applicable ULIP charges.
There is no denying that ULIP insurance is one of the best portfolio choices for any beginner. You not only combine insurance and investments for wealth creation, but you also get tax benefits at the same time. The flexible nature of the investment also helps you tackle market volatility in the short term and emerge with handsome returns in the future. These aspects make ULIPs an ideal option for starting your investment journey. We have just covered the basics, and you can now delve into learning more in-depth about these products to figure out which one would be the most suitable for your needs. Start exploring the different ULIPs offered by insurers today!
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.