Is financial plan for family’s future getting ULIP edge?

Your big dreams for your family’s future come with big price tags. Whether it is setting up your own business in 15 years, your child’s higher education or your retirement, all require substantial amounts of money. 

Of course, you need to do financial planning to ensure that you have the money ready when you need it. But how do you opt for the right investments that will help you cross the finishing line with ease? Enter Unit Linked Insurance Plans (ULIP). They are the ideal cornerstone in anybody’s financial planning.  

ULIPs offered by life insurance companies provide you a combination of life insurance and long-term growth for investments made over its term. With them come a host of advantages that help you go a long way in meeting your financial goals.

Financial protection even the best performing investments made over time come to nought if your family doesn’t have adequate financial protection in the form of life insurance. Remember, in the event of your sudden absence, your family will need to dip into your savings to meet regular expenses and major future expenses such as your child’s higher education. 

Since individuals are unlikely to have adequate savings for such situations, they need the helping hand of life insurance protection. In the case of certain types of ULIPs, namely ULIPs with features for securing a child’s future, there are provisions for payment to the child during such an event, even as the life insurance protection continues and another payment is made on maturity.    

Access to growth investment in equities typically provides high growth in the long term i.e. 8-10 years or more. However, individual investors don’t have the time and expertise to invest in equities. It is here that ULIPs help investors by offering ULIP funds that invest in equities in different proportions along with debt. 

Depending on the investor’s comfort level with risk, he or she can accordingly opt for a ULIP fund with a certain proportion of debt and equity investments. Since all major financial goals such as the child’s higher education or one’s own retirement require substantial amounts of money, ULIPs earmarked for such goals can be truly advantageous.

Apart from choosing a ULIP fund according to your choice, during the ULIP term, you are allowed to move from one fund to another. This is a very useful feature as during the course of work life, we typically witness substantial increase in income. This typically makes us open to taking higher risks, to benefit from higher long-term rewards. Thus, some years into the ULIP term, you can move on to a ULIP fund with higher proportion of equity investments. 

ULIPs have another flexibility feature that helps you save more. The top-up facility helps you direct lump sums like bonus, large increment amounts and refunds to the ULIP. If these lump sum investments are made during the initial part of the ULIP term, it creates a larger base of principal amount that benefits from high long-term growth from equities.         

Tax advantage

When you invest in a ULIP, you also get a host of tax advantages. First, there is annual tax deduction of up to Rs 1.5 lakh under Section 80C for regular premiums. Second, the maturity amount is tax exempt under Section 10(10)D provided the life insurance amount is at least 10 times the annual premium. 

Then, there is another important tax advantage. Unlike equity mutual funds where moving from one fund to another results in long-term capital gains tax of 10%, for investments more than one-year-old, in ULIPs, switching is tax-free. This means you manage to retain more of the money for your financial goals.

Rewards long-term investing

For those who struggle to invest regularly, ULIPs instill financial discipline and help make progress on two fronts in one shot: financial protection and growth of money. Unlike most mutual funds, you can’t make an early or premature exit from ULIPs—the earliest exit point is after five years. This helps the ULIP fund manager make long-term investments that improve long-term returns and help save more. This keeps the process of accumulation and investment discipline for major financial goals intact. 

ULIPs also provide loyalty bonuses. These payments, a percentage of the life insurance coverage amount, are made once you complete a certain part of the ULIP term, say 10 years. Subsequently, you receive periodic payments, say, after every five years. Needless to say, this enhances the final savings amount for financial goals earmarked to a ULIP.      

It is quite evident that the combination of advantages listed above makes ULIPs great candidates for providing a big edge in the financial planning process. As Indians start looking at ULIPs from the broad-based financial planning perspective, they will surely benefit greatly from its various advantages. 

(The writer is CMO and Head Products & Strategy at IDBI Federal Life
Insurance)

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