The life insurance cover offered by a ULIP provides for survivors if the life insured dies early. And she gets a sizeable corpus to achieve her life goals, including funding the golden years, if she survives the term. Here are some benefits ULIP offers that make it essential in each long-term investor’s portfolio.
Flexibility
The biggest advantage of a ULIP is that it allows the policyholder to design the plan for herself. She can choose the policy term, premium payment term, as well as the frequency to pay the premium. She is offered a wide variety of fund options which provide exposure to both stocks and bonds in varying proportions. Depending on her risk-taking capacity, she can instruct the insurance company to allocate the premium paid to the funds of her choice. ULIPs also allow seamless switching between two fund options, which helps when an investor intends to move money from one asset class to another. Some ULIPs also allow premium payment holidays, as well as changes to the sum assured, subject to clearly defined terms. This flexibility helps in designing customised solutions for the policyholders.
Transparency
Though ULIPs offer market-linked returns, the benefit illustrations help investors understand the product and set the right expectations. They clearly define the sum assured payable in case of eventuality. They also specify the charges under all heads, and the customer is always kept informed about all fund movements and unit allotments, whether at the time of premium payment or when switching from one fund to another.
Long term compounding
While investing for the long haul, investors should aim to generate returns that beat the rate of inflation. This can be possible if the investor includes equity in her portfolio. However, stocks are volatile in the short term. The best way to make them work for you is to invest in equities regularly and hold on to them for the long term. ULIPs come with a minimum five-year lock-in. Buyers are always encouraged to go for longer policy tenures. Compounding ensures that a buy-and-hold approach leads to a large corpus.
Asset allocation for financial goals
While stocks create wealth over the long term for disciplined investors, asset allocation provides a disciplined, scientific decision-making framework. If the investor has a long enough time horizon, she can allocate more to equities. For example, if an investor plans to retire 20 years from now, then she can buy a ULIP and instruct the insurer to allocate 80% of the money to equity funds and the rest to bond funds. This asset allocation needs to be monitored and rebalanced with fund switches. In the above example, as the policyholder gets closer to her retirement, the allocation to bonds should be enhanced with a view to curtail exposure to risky assets – equity. In this case, the money can be gradually transferred by selling units of equity funds and using the proceeds to buy units of debt funds through the switch facility.
This asset allocation-based investing implemented under ULIP over the long term can help investors create sustainable wealth.
Taxation
Though equity portfolios can beat inflation, the second biggest challenge for investors – taxes – remains. ULIPs help investors on this front as well. While the premium paid towards ULIPs is eligible for tax deduction under Section 80C of the Income Tax Act, under the old tax regime, the maturity proceeds are exempt under Section 10(10D) of the Income Tax Act. There are no tax implications for switches between two fund options under one ULIP. Put simply, signing up for a long-term ULIP can be the beginning of a tax-free wealth creation process in the long term.
Since tax rules may undergo changes, it is better to consult tax practitioners before buying a ULIP to avail tax benefits.
Considering all these benefits, a ULIP is a must-have investment in all long-term portfolios aimed at wealth creation.
