Wealth management requires detailed analysis and planning. To ensure financial freedom in the future, you need to save today and manage your wealth. It is important you save and invest as soon as you start earning an income.
In recent times, Unit-Linked Insurance Plans (ULIPs) have gained popularity as an excellent investment product. This insurance plan allows you to gain exposure to equity while the earnings are exempt from Long-Term Capital Gains (LTCG) tax. This financial instrument has delivered consistent returns in the past, which helps in building your wealth over the long-term.
Understanding ULIPs
A ULIP plan combines life coverage with investment by allowing you to invest in different asset classes such as debt and equity. A predetermined portion of the premium is invested in your chosen asset class. ULIPs offer an efficient and affordable way to accumulate wealth through higher returns in the longer period. Therefore, these insurance plans have gained importance and area preferred choice to meet financial goals.
Here is how you may grow your savings using ULIP insurance plans.
- Maturity proceeds
When you invest in a ULIP and hold it until maturity, you are able to earn maturity proceeds. The insurance companies pay a lump sum amount as the maturity benefits at the end of the policy term. These maturity proceeds depend on the type of policy and the returns earned on your chosen asset class.
When you stay invested in a ULIP until maturity, you are able to accumulate a sizeable corpus. This money may be used to meet various financial goals such as children’s higher education or your financial independence on retirement.
- Power of compounding
The power of compounding is a very beneficial feature and plays a crucial role in delivering higher ULIP returns. When you invest in ULIPs, a certain portion of the premium is invested in assets like equity or debt. This investment earns certain returns over a period of time. When you stay invested in the plan, the returns are also able to earn, thereby allowing you to accumulate wealth over the long-term through the power of compounding.
- Tax advantages
Another beneficial feature of ULIPs is its tax benefits. Subject to certain conditions, the premium paid for availing of this insurance plan is eligible for tax benefits under section 80C of the Income Tax Act. This helps to reduce your annual tax liability and these savings may be invested to earn further returns.
Additionally, the death benefits paid to your beneficiaries in case of your demise during the policy term are tax-free. Moreover, maturity proceeds received at the end of the policy period are also eligible for tax benefits under section 10(10D) of the Income Tax Act. These tax benefits ensure you do not pay a huge amount as taxes to the government, which enables you to build wealth over the long-term.
- Flexible investments
As already mentioned, a certain portion of the premium is invested in debt or equity instruments or any combination thereof. Most insurance companies offer pure equity, pure debt, or balanced funds. Your returns are linked to the performance of these underlying asset classes.
Insurance companies allow you to switch between funds providing flexibility. Therefore, if a particular fund is underperforming, you may switch to the one that delivers better performance. Moreover, you may switch from one asset class to another based on your changing life goals. For example, when you are young at the start of your career, you have lesser responsibilities and are able to assume higher risks. Therefore, you may take more exposure in equity funds. However, as your responsibilities increase and you move closer to your retirement age, you may opt for debt funds that deliver lower but assured returns.
ULIPs provide several benefits that allow you to build wealth in the long-term. However, here are three tips to maximize your returns:
- Remain committed
Several ULIPs are available for 20 years or longer. Investing in these plans is recommended only if you have a long-term investment horizon. As per the regulatory guidelines, the minimum holding period for ULIPs is five years. Many investors opt to withdraw their investment at the end of this lock-in period. However, to maximize your returns and accumulate wealth, it is important to remain committed until maturity.
- Take a proactive approach
ULIPs provide the flexibility to switch funds to maximize your benefits and control your investments. Therefore, it is recommended for you to adopt a proactive approach and switch funds based on market performance and your risk appetite to build wealth over a longer duration.
- Choose to buy online
A huge benefit when you buy ULIP online is that it is a more cost-efficient option. Unlike the traditional method of investing, online investing eliminates intermediaries like agents and brokers. Additionally, the insurance companies are able to reduce their administrative costs and other overheads. These cost savings mean you have a higher investible surplus, which earns returns over the long-term.
The attraction of life coverage and earnings in a single financial instrument makes ULIPs a popular investment option. There are various plans offered by different insurance companies. It is recommended you compare the different plans and understand the features, terms, and conditions to make an informed decision.
