ULIPs offer the dual benefit of protection and wealth creation for policyholders. Here is how a ULIP works to create sustainable wealth over the long term.
Long-term orientation
A ULIP, in its current avatar, comes with a five-year lock-in period. It is a long-term plan that combines life insurance and investment. The regular premium option of a ULIP allows the payment of premiums at regular interval – monthly, quarterly and yearly. Most investors choose to pay premium monthly. These regular contributions, along with the lock-in period, encourage disciplined long-term investing, which offers a sustainable edge to investors in volatile markets. Regular premium payment facility also provide convenience, as policyholder pays as she earns. Together, these factors inculcate the discipline, consistency and patience required for long-term wealth creation.
Power of compounding
The long-term approach also enables sustainable wealth creation. ULIPs invest in both stocks and bonds. Investors can choose specific fund options offering exposures to segments such as large-cap or mid-cap equities, or they can opt to invest in bond funds. Investors can also choose hybrid options based on their risk profiles – aggressive, moderate, or conservative which offer varying mixes of bonds and stocks, with proportionate risk-reward characteristics.
Regular investments in the funds chosen by the policyholder offer the benefit of compounding. The interest received and profits booked on securities held in the fund portfolios are reinvested over longer periods. Since ULIPs are long-term products, investors remain invested even during market downcycles and continue buying at lower prices. When markets recover, they benefit from this disciplined approach.
Flexibility
Though ULIP are long-term products, they offer several features that provide flexibility. ULIPs allow top-up premium payments. This facility can be particularly useful for enhancing fund value, especially when markets are low. The policyholder can also commit her incremental savings on a regular basis.
Switch facility allows the policyholder to move from one asset class to another seamlessly. A savvy policyholder may allocate more funds to equities in the initial years of the ULIP and, as she moves closer to maturity, gradually shift the accumulated money to bond funds using the switch facility. This arrangement helps protect the wealth accumulated over the long term from the vagaries of the stock markets.
Tax benefits
Policyholders also enjoy tax benefits when they invest in a ULIP. Premium contributions made to ULIP are eligible for tax exemption up to Rs 1.5 lakh under section 80C of the Income Tax Act. Death claims are exempt under section 10(10)D of the Income Tax Act. Maturity claims are also tax exempt, subject to terms around annual premium and sum assured to premium ratio. Gains are taxable if the premium paid is more than 10% of the capital sum assured. Also, gains on ULIPs are taxable if the annual premium outgo exceeds Rs 2.5 lakh.
During the policy tenure, as the money compounds, switches from one fund option to another within a ULIP are tax-neutral. In contrast, if an individual moves between stocks and bonds outside a ULIP in her investment portfolio, such transactions are considered as sales and may attract tax on capital gains.
ULIPs thus allow policyholders to compound their wealth without worrying about the taxes payable during the investment tenure.
Cost efficiency and transparency
Though ULIPs offer market-linked returns, they are transparent at each stage. Regular declaration of net asset value, portfolio holdings and portfolio strategy updates keep policyholders well informed about their investments. Over time, costs have come down significantly, and many insurers have launched innovative products that refund certain charges at maturity.
This acts as an added incentive for policyholders to remain invested for the entire tenure. Generally, the longer the ULIP tenure, the lower the effective costs tend to be.
ULIPs thus can help build a substantial corpus to achieve long-term financial goals such as retirement. At Ageas Federal Life Insurance, we believe that all promises can come true. Whether a policyholder aims to secure a comfortable retirement or provide quality higher education for her child, our ULIPs are designed to help turn these aspirations into reality. A disciplined approach to money management, a customer-centric philosophy and a prudent life insurance framework make ULIPs effective tools for sustainable wealth creation for most Indians.
