How to explain ULIPs to the layperson?

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There will undoubtedly be many goals you have in mind for your life. While some of these will be for the near future, others can be long-term. Long-term objectives can include:

How to explain ULIPs

Choosing the correct investments for your portfolio is critical if you want to reach these objectives. It would be ideal if you focused on long-term investments in this case.

In this situation, ULIP Insurance is among the top options for securing your long-term objectives. Investments in ULIPs can be profitable in a variety of ways. Let’s start by understanding ULIPs and how they function.

What Are ULIPs?

A Unit Linked Insurance Plan can be defined as an investment and insurance product. The premium payments under this plan can be made either annually or monthly by the policyholders.

The premium paid towards a ULIP policy is invested in the market-linked fund option of your choice after deducting all applicable charges. The investments in these plans are susceptible to market risks.

In their investment portfolio, the policyholder is responsible for the investment risk. Therefore, it is advised to base your investment decision on your needs and level of risk tolerance.

The applicable charges on ULIPs are another aspect that the policyholder must consider. A unit-linked plan is more transparent in this regard. All fees, such as those for fund management and allocation, are disclosed upfront.

In addition, Unit Linked Insurance Plan investors can switch their investments from debt to equity and vice versa without having to dash from one financial institution to another or worry about being charged.

Unit Trust of India (UTI) established ULIP plans for the first time in India in 1971. The Life Insurance Corporation’s ULIP offerings came next – in 1989. However, due to the high fees attached to this insurance-investment product, many investors initially shied away from investing in ULIPs.

Newer ULIP policies, on the other hand, have bare minimum charges and various features to guarantee investors the highest profits and total insurance coverage.

Can Anyone Invest in a ULIP?

To purchase a ULIP, having a particular goal in mind is best. Long-term investments are suggested in this plan because ULIPs pay out more benefits in the long run.

Therefore, setting a long-term goal is ideal when buying a ULIP. Your investment in a ULIP also relies on your financial situation and risk tolerance. The following life stages allow you to choose a ULIP:

Those Who Have Recently Begun Their Careers

To start, a young professional can choose a balanced fund option for less risky finances. Then, they can transfer their funds to higher-risk equity funds when their income and risk tolerance grows.

Due to their age, they may be more willing to take on a high level of risk and have the chance to make long-term investments. As was previously said, returns increase as investments are kept for longer durations.

People Making Retirement Plans

ULIP Plans are ideal for those who want a consistent income stream after retirement. To accumulate funds available after the policy’s maturity, they can pick a suitable ULIP.

Furthermore, depending on the preference and needs of the policyholder, the ULIP can potentially be converted into an annuity plan wherein you can get periodic payouts for life. Therefore, even after retirement, one can receive recurring payments.

Individuals Beginning A Family

Family planning has a crucial financial component to it, and figuring out how to provide a secure future for your child is one of its paramount objectives.

ULIP Plans are helpful for those who are looking to start a family. A ULIP child plan uses your savings to create a steady fund that can be utilised to support your child’s goals in life.

The life insurance coupled with it guarantees that your child’s financial needs would be met even in the event of your death.

What are the Key Benefits of ULIPs?

Investing, saving, and life insurance

Purchasing ULIPs can assist in developing essential saving and investing habits necessary for creating long-term wealth.

Additionally, ULIPs provide a life insurance policy in addition to savings opportunities with market-linked returns.

Therefore, one can invest in various market funds to achieve a high rate of return while feeling at ease knowing they have life protection.

Linked to the Market Returns

The option to earn market-linked returns is provided through ULIP plans.

After all applicable charges are deducted, a ULIP plan’s premium is invested in various market securities, including debt and equity, in varying amounts.

The policyholder has a chance to receive market-based returns. Investors may monitor returns and make sure they remain invested in the best ULIP plans by using various statistics, such as the ULIP NAV (Net Asset Value).

Death Benefits

If the insured person passes away while the policy is still in effect, a unit-linked plan will pay out death benefits to the nominee(s).

As the death payout is covered by Sum Assured and the fund’s value, benefits may vary depending on the reason for the insured’s death.

Maturity Benefits

If the policyholder survives the policy period, a ULIP plan also includes a plethora of maturity advantages.

Upon maturity of the policy, the insurance provider pays out the fund value of the ULIP as maturity benefits to the policyholder.

The combined total value of the funds in your holdings (subject to their market performance) makes up the fund value of your ULIP.

Additionally, some insurance companies may offer add-on benefits at maturity, like a fund booster, depending on the terms and conditions.

Benefits of Long-Term Investment

For those who want to get the best returns on their long-term investments, ULIP plans are one of the most popular investment vehicles. However, realizing short-term results may be impacted by market volatility and swings is crucial.

Instead, by holding the investment for a longer time frame, investors can more easily manage market volatility and realize a high rate of return striking a perfect balance of funds.

Benefits of Withdrawal

After a lock-in period of 5 years expires, ULIP plans permit their clients to withdraw a portion or all of their accumulated corpus in the event of an emergency.

Such withdrawals are tax-free under section 10D of the Income-Tax Act, 1961, but there might be a limit to how much you can withdraw specified in your policy document. It is typically a percentage of your fund value.

Tax exemption benefits

ULIPs have tax benefits under sections 80C and 10D of the Income Tax Act of 1961. The former allows for exemptions on the premiums (up to Rs.1.5 lacs), and the latter allows the death benefits to be tax-free.

The maturity benefits are tax-free only if the total annual premiums are less than Rs.2.5 lacs. Additionally, The LTCG (long-term capital gains) for Equity Oriented ULIPs issued on or after February 1, 2021, will be tax-free up to Rs. 1 lakh for the given financial year.

For equity-oriented ULIPs, LTCG profits that exceed the exempted limitations will be subject to a 10% tax rate. Capital gains tax would be levied at the applicable rates on the revenue from debt-oriented ULIPs.

How Can You Utilize It For Your Goals?

ULIPs are versatile insurance products that can serve many purposes, as discussed earlier. From Child Plans to Retirement Planning to just long-term wealth creation, ULIPs can be utilized to fulfill multiple life goals.

To compare different ULIP options, you can use a ULIP calculator, which is available online for free. It can tell you the expected returns based on your premiums, choice of funds, and the sum assured. So start researching for the perfect ULIP plan today!

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