How ULIPs Work and Things to Know Before Investing in One

A life insurance policy is an essential investment option for every household. If you have dependent loved ones, you certainly want to secure their financial future for uncertain times. However, you also want added benefits from your investment, and this is where Unit-Linked Insurance Plans (ULIPs) can help. Read on to know what is ULIP plan and how it can help.

How do ULIPs work?

The best aspect of a ULIP is that the insurance policy offers monetary benefits to your nominees, and it builds wealth as well. These two ULIP benefits put this life policy ahead of most other insurance options.

Another thing that makes ULIP a great investment option is its flexibility. When you buy the plan, you can decide how the money is divided between debt and equity investment funds. You can even choose a balanced option if that seems more profitable. Depending on the type of instrument to invest in, experienced fund managers handle the money. The top-performing ULIP funds always make sure that you receive the best possible returns from your investment to help you earn a substantial fortune. You can even change your investment plan between equity and debt anytime during the tenure of the ULIP. This helps you manage your investment strategy depending on your changing financial goals, risk appetite, and the market situation.

Advantages of ULIPs

ULIP has three main benefits:

Life insurance

ULIP is essentially a life insurance policy. It provides financial cover to the nominees of the policyholder in case of an unfortunate event. If you have loved ones, who depend on you financially, you must secure their future monetary needs in your absence. The life insurance policy component of ULIP offers that benefit.

Wealth build-up

As you age, your financial goals keep changing. Saving for the future is important to ensure that you have enough money to fulfill essential requirements like your child’s education, wedding, or a comfortable retired life for you. The top performing ULIP funds come with the option to build a considerable fortune, as you can invest in debt and equity instruments through them. ULIP is a great long-term investment option that creates your wealth with compounding returns. The Insurance Regulatory and Development Authority of India (IRDAI) makes it mandatory for ULIPs to have a five-year lock-in period, making it an investment option for a long duration by default.

Tax benefit

Apart from the life insurance benefit and wealth build-up, you can avail of income tax deductions by investing in a ULIP. Section 80C of the Income Tax Act, 1961 allows an annual deduction of up to INR 1.5 lakh on the premium paid towards ULIP. Additionally, Section 10(10D) makes the maturity benefit from ULIP tax-free.

Things one should know before investing in ULIP

You should learn a few aspectsof ULIP before investing in it:

It offers a certain amount of coverage to your nominees in your absence. This amount will be either the sum assured decided at the time of policy initiation, or the value of the fund on the day of the pay-out, or 105% of the premiums you paid;this can vary among insurers

It has a lock-in period of five years, which is the minimum policy term

It allows partial withdrawal after the lock-in period

It can be discontinued after five years, but you can revive the plan within two years from then

All these ULIP benefits make this life policy a profitable investment option if you wish to secure your family’s financial future and create a substantial corpus.