The rising popularity of Unit-Linked Insurance Plan (ULIP) is a result of its dual advantages, which include a life insurance policy cover and investment options. Read on to know the ULIP meaning and more details about the policy.
What is ULIP?
A ULIP is a life insurance policy, but it has the added benefit of wealth build-up. You have to pay a premium regularly to keep the policy active. Your insurance provider levies a very small percentage of the money as various charges. They invest the remaining capital in different funds, such as equity and debt. You can also choose to diversify your money by investing in a way that combines both equity and debt-based instruments. ULIPs accumulate into a substantial fortune over an extended period.
Now that you understand the ULIP meaning, let us look into some of its plus points that make the policy a preferred choice among Indian investors.
1. Builds good investment habits
ULIPs have a five-year lock-in period, ensuring that you stay invested in the policy for at least this duration. You need to pay your premium on time to maintain the policy during this tenure without the option to withdraw money. This ULIP feature helps you develop a disciplined investment habit and patience. These skills can make you a wise investor. Once you have good investment habits, you can earn high returns in the long run.
2. Tax benefits
One of the ULIP benefits that make it a profitable investment option is its tax exemptions. ULIPs offer multiple deductions, such as:
- Your premium is tax-deductible up to INR 1.5 lakh per year according to Section 80C of the Income Tax Act, 1961
- You get a tax-free maturity payout if you bought the policy before February 1, 2021, as per Section 10 (10D) of the Income Tax Act, 1961
- Your maturity benefit remains tax-free if you pay an annual premium lower than INR 2.5 lakh; however you have to pay a 10% Long Term Capital Gains (LTCG) tax on the maturity proceeds if your yearly premium exceeds this amount; this applies to policies bought after or on February 1, 2021
- Your family members will receive a tax-free death benefit, irrespective of when you purchase the policy
3. Flexible investment options
ULIPs let you decide whether to invest your money in equity, debt, or a combination of funds. This versatility permits you to choose an investment avenue depending on your financial goals and risk tenacity. Equity funds are risky but have the potential to provide higher profits. Debt funds attract lesser risk and offer moderate returns.
One of the unique ULIP benefits is the fund-switching facility, giving you more control over your investments. With the switching alternative, you can reallocate your money among equity and debt funds at any time during the policy tenure. However, your insurer may allow only a few free switches per year and charge for additional switching.
Types of ULIPs
The forms of ULIPs depend on their premium payment and fund options. This list will give you a better idea:
- Regular premium
Here, you need to pay multiple premiums during the policy tenure. Insurers let you choose between yearly, half-yearly, and monthly premium payment choices.
While purchasing a ULIP with the single-premium option, you have to pay the entire amount as a lump sum at the time of policy initiation. Once you pay it, the policy will remain active for its entire tenure.
- Equity and debt fund-based funds
The type of ULIP you have depends on your investment choices. If you put your entire capital in risky but high-returning avenues, such as shares, it will be an equity-based ULIP. In the case of a debt-based ULIP, the insurer will invest your money in less risky fixed interest instruments, government securities, and similar products.
Now that you know its advantages, it is easy to understand why you should invest in ULIP now.