Unit-linked insurance plans (ULIPs) have emerged as a popular investment-cum-insurance instrument in recent times. These plans provide the dual advantage of market-linked returns and life cover, making them ideal for individuals looking to secure their family’s future while creating wealth. This article examines how ULIPs can help investors earn good returns over the long run through various funds while also providing financial protection to valued ones.
What is a ULIP?
A ULIP is a life insurance policy that provides coverage and investment options to generate returns linked to capital markets. A portion of the premium paid goes towards providing life cover, while the remaining amount is invested in funds such as equities, debt, etc., as per one’s risk appetite. Professionals manage the funds to optimise growth potential.
The invested portion offers exposure to various asset classes, enabling policyholders to earn market-linked returns over time. The insurance coverage component offers financial security to one’s family in case of unfortunate events. Thus, ULIPs provide the combined benefit of insurance and smart investments.
How Do ULIPs Work?
In a ULIP, the premium is split into two portions—one for insurance coverage and the other for investments. The investment portion is invested in debt, equity, or balanced funds, and the returns depend on those funds’ Net Asset Value (NAV). The risk depends on the type of fund selected. For instance, equity funds carry a higher risk than debt funds but also have the possibility for better returns over time.
One can choose funds aligned with one’s financial goals and ability to tolerate risk. The funds can be switched later if needed. In case of the policyholder’s untimely death, the insurance cover ensures financial aid for their beneficiaries.
How Do ULIPs Offer Investment Opportunities?
ULIPs provide the flexibility and transparency to invest across various funds per changing risk profiles and financial goals. Following are the ways how they enable smart investments:
Range of Fund Options
ULIP plan offers a wide choice of fund options to invest one’s money:
- Equity Funds: These are designed for aggressive investors willing to take risks for higher returns, primarily investing in stocks.
- Debt Funds: Investing in fixed-income instruments is ideal for risk-averse investors seeking stable returns.
- Balanced Funds: Ideal for moderate risk-takers, offering a mix of equities and debt.
- Liquid Funds: These are invested in cash and cash equivalents and are ideal for safely parking funds in the short term.
Long-Term Wealth Creation
The power of compounding over long tenures of 15-20 years makes ULIPs ideal for wealth creation targets like retirement planning, children’s education, etc. Investors can earn inflation-beating returns of 10-15% annually in equity funds.
Flexibility to Switch Funds
One can switch between different funds available in ULIP at any time according to changing risk appetite and market conditions. This adjusts asset allocation to balance safety, returns, and liquidity.
Additional Investment Option
The option to invest top-up amounts over and above regular premiums allows for enhancing the investment corpus and achieving financial goals faster.
Professional Fund Management
Qualified and experienced professionals manage the investment portfolio in ULIP funds to deliver better returns than an individual may manage independently.
How Do ULIPs Provide Life Insurance Cover?
While helping create wealth through market-linked investments, ULIP also ensures financial stability for one’s family in case of an unfortunate event. The following are ways ULIPs ensure protection:
- Provide life insurance cover chosen at the start of the policy
- Covers risk till maturity term (up to 30 years)
- Sum assured paid to nominee irrespective of returns earned
- Can enhance protection by adding riders for added premium
Tax Benefits on ULIP
ULIPs also offer tax benefits on premiums and maturity benefits:
- Premiums eligible for deduction under Sec 80C up to ₹1.5 lakh
- Maturity corpus tax-free under Sec 10(10D) after 5 years
Choosing the Best ULIP
While returns and tax benefits make ULIPs attractive investment propositions choose a plan carefully based on the following:
- Align investment styles to funds as per risk appetite
- Compare charges of various ULIPs before buying
- Analyse historical returns across equity and debt funds
- Select a reliable insurer with a good claim settlement record
- Use the online ULIP calculator to estimate the required investment
Factors to Consider Before Buying a ULIP
While ULIPs present a compelling proposition, investors must assess a few aspects before purchasing one:
- Alignment with goals: Check how well the ULIP matches one’s investment horizon and corpus needs
- Risk appetite: Evaluate personal risk tolerance before deciding on equity vs debt funds
- Lock-in and liquidity: ULIPs have a 5-year lock-in, so liquidity needs must be assessed
- Charges: Compare charges of various ULIPs as high costs can impact net returns
- Insurer reputation: Review insurer claim settlement record and financial strength
Conclusion
ULIPs offer a dual advantage of earning market-linked returns that beat long-term inflation while securing the family’s future. Careful selection of ULIP plan-based risk profile and thorough research can make it a rewarding investment experience. Assess how aligning ULIP investment styles with your financial priorities can shape your wealth creation journey in the long run.
Contact PNB MetLife to learn more about the investment opportunities ULIP offers.
