Know why ULIPs should be part of your investment portfolio
Five reasons why ULIP should be part of your investment portfolio
Bajaj Allianz Life Insurance
For different investment needs, there are different types of investment instruments. While some offer high returns at higher risk, others offer lower but stable returns. Then there are some products, which offer tax exemptions, or lower tax incidence, while others don’t. To add to this, there are schemes, which offer insurance cover along with reasonable returns on the invested amount. Every investor has to trade-off some benefits with others to arrive at a strategy that suits their risk appetite and profile.
As per a report on “Investment Pattern of Youth in India”, supported by Bombay Stock Exchange, young investors are becoming more inclined towards taking risk and hence market-linked investment products have gained favour with them. At the same time, tax saving is one of the main reasons behind investment by the youth, says the report [1].
Enter, ULIPs!
What if there is a way where you can invest in market-linked products earning optimum returns, have a life cover along with it, and also get the tax benefits on those investments. While this may seem too good to be true, but Unit-Linked Insurance Plans (or simply called ULIP) are specifically designed to deliver just that. If a ULIP is not a part of your investment portfolio, here are five reasons why it should be
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Dual Benefits in a Single Package: ULIPs fulfil one’s need for both investment and protection. When one invests in a ULIP, they need to pay a fixed premium for the selected cover amount. ULIP is an investment option which offers the policyholder the dual benefit of investing in either equity funds or debt funds (or both), while providing life insurance coverage. Policyholders pay premiums, a part of which is channelized into the stock market, and the remaining amount is used to provide life insurance cover by the insurance companies. However, one must be wary of different charges while deciding on which insurer to go with. These charges may include premium allocation charge, policy administration charge, fund management charge, mortality charge and surrender or discontinuance charge. It is always better to go with an insurer which offers lower charges on these accounts as every penny saved would result in significantly higher returns on maturity due to the compounding effect.
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Higher Potential Returns: Since ULIPs involve investment in equity and debt market through various funds, they have the potential to offer higher returns compared to some other investment instruments. If one is willing to take more risk, they can invest in equity fund while a more conservative investor may invest in debt funds through their ULIP investment. Also, since diversification is one of the core principles of successful financial planning, ULIPs can serve that purpose as well as one can make their asset allocation in debt and equity funds as per their risk profile. ULIPs also offer flexibility to switch between funds. However, most insurers offer only a limited number of switches. Before you decide which ULIP to go with, it is a good idea to find out how flexible the scheme is in terms of the number of switches allowed during the term of the policy. This is important because a savvy investor can maximise returns by carefully reallocating funds depending on market conditions.
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Tax Benefits: Investments made in ULIPs are eligible for tax deductions under Section 80C of the Income Tax Act, 1961. An investor can claim up to Rs 1.5 lakh every year. Similarly, maturity returns on ULIPs are exempted from tax under Section 10D of the Income Tax Act, 1961. Moreover, the amount received by the nominee upon the death of the policyholder is also exempted from tax. The above benefits are subject to provisions of Income Tax Act, 1961, as amended from time to time.
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Flexible Payments and Withdrawal: One thing that the Coronavirus pandemic has taught us is that no matter how well you plan for your finances, circumstances can change warranting a change in investment strategies. With changes in circumstances, one may want to change the frequency of investment or increase the investment amount. Many ULIPs offer that flexibility and one can opt to alter their premium payment frequency any time, to any other premium payment frequency, be it yearly, half-yearly, quarterly or monthly. While one can increase or decrease the payment amount, but it has to as per the minimum premium limits under the plan. Similarly, one also has the option to receive the death or maturity benefit in instalments payable monthly, quarterly, half-yearly or yearly as per the product opted for and in line with product terms and conditions.
- Option of Riders: Because ULIPs provide the dual benefit of insurance along with investment, hence many insurance companies also offer additional rider benefits that one can add on cover to their policy at a nominal extra cost. These may include accidental death cover, permanent disability cover, critical illness cover, family income benefit rider and so on. These add-on features help the insured individual in special and unforeseen circumstances. For example, in case of a permanent disability, the policyholder will receive the sum assured had he taken the permanent disability rider. He could use this money for treatment or any other purpose. Similarly, a critical illness cover provides a large lump sum payment to the insured individual, which can be used as per the need of the family. A family income benefit rider provides the beneficiary with an amount of money every month if the policyholder dies.
Choosing the right service-provider
With so many investment options available in the market, selecting the suitable investment instrument for you may not be an easy task. However, the main things to keep in mind are the extra costs associated with the policy, flexibility in terms of payments and withdrawal, ability to switch between ULIP funds and any additional features that may add value to the maturity amount.
Insurance companies like Bajaj Allianz Life Insurance have policies that may help customers fulfil their investment objective. For instance, the Bajaj Allianz Life Goal Assure plan comes with features like return of mortality charges, choice between eight different funds and four portfolio strategies. These features combined may result in optimum returns for the policyholder over the investment period [2].
The bottom line is that one should consider adding ULIPs to their investment mix as they offer a striking balance between providing life insurance cover while providing market linked returns — a one-stop solution for your family’s financial security and your long-term financial goals. The added tax benefits on investment as well as maturity is just the cherry on top.
Source:
[1] https://www.bseindia.com/downloads1/investment_pattern_of_youth.pdf
[2] https://www.bajajallianzlife.com/ulip-plans/financial-life-goals-assure.html
Source:
[1] https://www.bseindia.com/downloads1/investment_pattern_of_youth.pdf
[2] https://www.bajajallianzlife.com/ulip-plans/financial-life-goals-assure.html
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First Published: Sep 30 2020 | 5:04 PM IST
