When it comes to long term wealth creation, investors have many options like fixed deposits and endowment policies. But recently, more and more investors are looking towards Unit Linked Insurance Plans or ULIPs for their long-term investment needs. Among its peers, ULIPs have turned out to be one of the best options for long term corpus creation because of their many benefits.
What is ULIP?
A unit linked insurance plan is a combined product that provides the benefits of both investment and insurance in a single package. Part of the ULIP premium is paid towards the insurance aspect while the remainder is invested in various financial instruments like stocks and bonds. At the end of the policy tenure, the policyholder shall get the maturity benefit.
Benefits of ULIP for long term wealth creation
Let us now understand why ULIPs may be the best option for long term investment.
ULIPs have a lock-in period of 5 years, which means that you cannot withdraw any amount for the first 5 years of the policy. This is a good thing since it will imbibe a good habit of disciplined investing. Your corpus will build continuously for 5 years, and you won’t be tempted to withdraw the accumulated amount before that. Additionally, ULIPs offer one of the shortest lock-in periods among other insurance products like endowment policies etc.
Better Returns in Comparison
ULIPs have the possibility of much higher returns in comparison to other insurance products. ULIPs invest in equity and hence the returns always tend to be higher than other tax-saving schemes. When it comes to tax benefits, here too, a ULIP plan wins out because the maturity amount is completely tax free in the hands of the policyholder. Tax saving FDs, on the other hand, are taxable according to your income tax slab.
ULIPs are flexible
ULIPs offer the flexibility of switching funds as per your wish. If you feel a certain fund is underperforming, you can switch it among growth, equity, balanced or income funds. Do note that a limited number of fund switches are free of cost per year. And unlike stocks, where you’re required to constantly monitor the stock performance, here you can simply make the switch and wait as your investment matures.
A pure insurance plan does not offer any maturity benefit, while a pure investment plan like mutual funds does not offer insurance benefits. ULIP plans are unique in the sense that they provide the dual advantage of investment as well as insurance in a single package. The sum assured can help your family in case of your absence. And if you outlive the policy tenure, the maturity benefit will be waiting for you. It’s a win-win situation.
Excellent Tax Benefits
Mutual funds attract income tax and so do returns from fixed deposits. ULIPs, on the other hand, offer excellent tax benefits. ULIP premiums are tax deductible up to Rs. 1.5 lakh under section 80C. Additionally, the maturity benefit from ULIPs is also completely tax free under section 80D(D).
Thus, the higher return potential, great tax saving benefits, lock-in period and flexibility of ULIPs all contribute towards building a healthy corpus over the long term. This makes ULIPs a great option for creation of wealth over a long term.