5 reasons why investing in ULIPs is a good option

A unit linked insurance plan, popularly known as ULIP, is one of the life insurance options offered by most insurance companies in the market. This is a hybrid product that combines the benefits of insurance and investment under a single scheme. ULIPs are available in flexible options based on one’s specific financial requirements and risk appetite. Almost all ULIPs have a specific lock-in period where a policyholder is required to pay premiums till the end of the chosen term.

There has been a raging debate on whether or not ULIPs serve as effective investment tools. There are experts in the industry who argue that insurance and investment must be kept separate from each other. They advocate buying term plans and mutual funds rather than ULIPs. With that being said, it is worth noting that the requirements of everyone do not remain the same. ULIPs have their own set of advantages which cannot be denied. Here is a list of five reasons on why investing in ULIPs is a good option:

1. ULIPs are effective for long-term investments.
The minimum lock-in period for a ULIP is five years, which is a sufficient time for capital appreciation and to earn decent returns. Moreover, the lock-in period associated with ULIPs will help people practice financial discipline. India is a country where most people search for fixed-deposit options when it comes to long-term investments. Fixed-deposit schemes offer a fixed interest rate on the money invested. However, ULIPs allow you to choose the type of investment based on your risk appetite. The returns provided by ULIPs are typically better than conservative fixed-deposit schemes.

2. Insurance benefit is something that cannot be denied.
The undeniable advantage of ULIPs over other investment schemes is the insurance benefit associated with it. If the insured suffers an untimely death during the policy term, the chosen sum assured amount along with the policy earnings will be paid to the nominee or legal heir. The life insurance coverage offered by a ULIP may not be as high as a term plan, but it does offer some level of protection for the insured’s family during a time of potential economic turmoil.

3. ULIPs have the flexibility of switching fund options.
In ULIPs, a portion of the premium amount paid by a policyholder is invested in various debt and equity instruments in the market. This flexibility allows policyholders to choose the level of risk they wish to take in their investments. If there is uncertainty in the market, you may opt for debt funds to play it on the safer side. If you are someone with great knowledge about market performance, you may predominantly opt for equity funds and earn higher returns. In case of long-term investments, the option to switch funds will be offered multiple times during the course of a policy term.

4. Charges on ULIPs have come down significantly.
In the past, ULIPs have gained some level of notoriety due to their high charges. However, this has changed over the years mainly due to increased competition and various regulatory amendments. Most of the top insurers in the market now offer ULIPs with no extra charges for insurance. For policies with terms less than 10 years, the charges are capped at a maximum of 3% of the net yield. For plan with terms higher than 10 years, a maximum of 2.25% of the net yield can be imposed as charges. This significant reduction in charges has made ULIPs a lucrative investment tool over some of the financial instruments available in the market.

5. ULIPs offer tax benefits.
Tax benefits are available under ULIPs for both the premium amount paid as well as the returns earned. This makes it one of the most effective tax-saving instruments in the market. The recent Union Budget has imposed taxes on long-term capital gains (LTCG) earned through mutual funds. While mutual funds cannot be completely ruled out despite this additional tax, the tax benefit works to the advantage of ULIPs on a certain level. A smart investor can choose the appropriate funds under ULIPs and generate decent earnings without any tax liabilities.

Conclusion
The debate on which is the ideal investment tool is bound to continue among investors in the country. As stated earlier, the requirement of one person will differ from that of the other. Irrespective of the investment tool chosen, the investor must make an informed decision in order to earn good returns from the market. ULIPs are certainly ideal for long-term investments and they work effectively for specific financial goals such as children’s higher education or buying a home. Before proceeding with the investment, it is necessary to check the fund performance over the course of the years and make the final decision accordingly.