The unit-linked insurance plan’s (ULIP) ‘insurance+investment’ versatility makes it the most attractive investment instrument for the average investor.
ULIP calculators provide you good estimates of how your corpus will grow. However, to get an idea of ‘what is ULIP plan’ and how it works, consider these key points before investing.
Long Investment Horizon
When you buy a ULIP, make sure you are in it for the long run. The investment component works best that way. ULIPs amortise key charges like fund management charges, admin charges, and mortality charges in the first few years of the plan. So, if you exit soon after the lock-in period, you will feel that the ULIP performance isn’t all that great in terms of return on investment (ROI).
Choosing Funding Option
ULIPs offer multiple funding options, i.e., the manner in which you want to distribute your funds to earn returns. This can be in equity, debt, or balanced funds (a mix of the two). Ideally, you should start off young when your risk appetite is high and put a larger portion of your corpus into equity funds (higher risk) than debt funds (low risk). As you grow older, you could set up automatic triggers, where any gains above a targeted level goes into the debt portion of your funds.
The above two points form the foundation of ULIP investing. You are looking to invest because of its benefits.
Of all the financial instruments out there, the ULIP offers the best insurance+investment option. It is a relatively safe option to grow an investment corpus, while at the same time getting life cover. Further, as mentioned above, you can always use the ULIP calculator beforehand to make the estimation on your returns.
Good long-term ROI is the ULIP’s key selling point. When you stay invested long-term, the occasional market fluctuation will not matter, and your investment will grow significantly. Therefore, curb that temptation to cash out immediately/soon after the lock-in period. In fact, try this as a good investment practice- discount the post-lock-in ULIP funds when you suddenly need some liquid funds. For instance, if you are looking to buy a car and want to put down a deposit, your post-lock-in liquid ULIP funds should not be part of your calculations to raise that amount.
Counterintuitively (to the previous point), the post-lock-in period of ULIP is a great liquid asset. You can avail partial withdrawals from your accumulated funds in case of genuine emergencies or life events – medical, tuition fees, wedding expenses, etc.
This advantage is maximised if you buy ULIPs early in life. Buying at an early age means lower premiums. The ULIP allows you to top up your investment funds, for instance when you might earn some surplus (like a bonus or cash gift). This can go into your corpus, which will now work with the extra funds to increase your returns.
The versatility of switching between funds is another key ULIP benefit. Swap your funds based on your risk appetite.
Caution: Do not overdo this by trying to follow or beat market movements. Ideally, this is an exercise to be done once a year – to assess your exposure to both risk and returns and make any adjustments, if required.
ULIPs are attractive to the average investor because of the tax benefits it provides. However, this must be taken with a caveat – tax codes change, and with it, tax benefits. A good example is the Indian 2021 Budget, which has made changes to the ULIPs tax exemption status. ULIPs with annual premiums above ₹250,000 will have their returns taxed at 10%, above an annual exemption of ₹100,000.
ULIPs offer systematic investment plans (SIPs), where you can invest periodically into a ULIP. There are two advantages here- it reduces your investment load and you can average out costs of the units over time. Within the ULIP universe, SIPs are the most popular mechanisms for investors looking to build an investment portfolio.
India’s Insurance Regulatory and Development Authority (IRDA) classifies the ULIP as an insurance product. But, it is its versatility as an investment and wealth-creation tool that has made this product so popular. You can do so too. Keep in mind the basics of such investments and rest assured that you have done the right thing for your future.