These days, young investors cannot rely on the complete breakdown of finance. You need to plan for the future of your loved ones, for life is more uncertain now than it was 10 years ago. It is also important to build your wealth simultaneously instead of relying on a job or business for your source of income. This is why ULIP plans are such popular choices these days.
What is ULIP?
The literal answer to what is ULIP is Unit-Linked Insurance Plans. The abbreviation and full form of the word do not define what is ULIP, but the gravity of these plans is hardly clear. So, let’s understand what is ULIP by breaking down its major components.
ULIP plans are a variety of life insurance policies. These unique types of life insurance come with aspects that improve the coverage and your earning potential with an investment component. Here are the 2 important parts of what is ULIP:
- ULIPs offer death benefits to your beneficiaries in the event of your demise during the policy tenure.
Much like any life insurance policy, when you purchase a ULIP plan, you need to define the policy tenure and sum assured. The sum assured is the amount that the insurer pays to the beneficiaries, i.e., nominees in your plan who are entitled to the payout. The death benefit is paid as a lump sum or monthly amount if you pass away during the policy period.
- ULIPs allow you to invest part of your premium in the unit-linked market to earn profits and build wealth.
Unlike most life insurance plans, you can also start investing in the current Unit Linked market using ULIPs. You can choose from market-linked and risk-free options based on your risk appetite. Per your preferences, the insurer will use your premiums to invest in the equity or debt funds to help you earn profits. You are free to mix the two to maximise your earning potential.
You can withdraw these profits when you need cash or they can remain invested to earn more profits. In the latter case, the insurer will pay these profits to your beneficiaries after your demise.
In return for availing these components, the insurer determines your monthly or annual premium. For most life insurance plans, the insurer sets the money aside to be paid as the maturity benefit if you survive the policy tenure. In the event of your death, the sum assured is paid as the death benefit.
In the case of ULIPs, the premium is divided into two parts. One part is allocated to be set aside as part of the purchase to avail of the death benefit. The other part is used to invest in unit-linked markets and earn profits. This makes ULIP plans the most efficient way to invest and earn money in today’s volatile market.
Advantages and disadvantages of ULIP plans
Once you understand what is ULIP, it becomes relatively easier to contemplate how you can use it to your advantage. So, here are the benefits of ULIP plan:
- ULIP plans allow you to secure the future of those you love after your death.
- ULIP plans also help you build your wealth instead of relying on a single income source.
- You can plan financial security for your loved ones and yourself with a single plan.
- ULIP plans to provide peace of mind for financial setbacks. You can withdraw the profits seamlessly at your discretion when you face financial crunches since the liquidation of assets is quick and easy.
- ULIP plans are eligible for tax benefits provided the total annual premium is less than 10% of the sum assured or less than INR 2.5 lakhs.
- You can choose to invest your funds in risk-free elements or make larger profits with risky investments. You can also diversify your portfolio for a balanced approach.
- You learn to build a savings habit. It inadvertently builds a corpus for financial upheavals.
Although ULIPs have more advantages, nothing in life comes without a negative side. So, here are the cons of ULIP plans:
- The premiums for ULIP plans are higher than most life insurance policies because they include the amount to be invested in the market.
- If the earnings from your ULIP plan exceed the preset criteria for CAGR, they will be taxed as Capital Gains.
It is noteworthy that when you invest in ULIPs, you are building a long-term plan for financial security. While the premiums may seem higher, the gains from these investments outweigh the costs. Additionally, the investment component in Ulip plans ensures that regardless of when the death benefit is claimed, your loved ones can circumvent the implications of inflation in India. While the sum assured may remain constant, they earn profits from the market in real time in compliance with the inflation rate.