Life insurance provides financial security to your loved ones in your absence. However, a sufficient cover usually requires you to pay a high premium. This can reduce the funds available for investment. There is a financial instrument that does both with ease, a Unit-linked Insurance Plan (ULIP).

What is a ULIP policy?

ULIP is a smart two-in-one plan, where your money is partly invested in funds and partly used to provide you with life insurance. It ensures that the security of your family in your absence and your wealth creation, both go together.

The life insurance aspect of a ULIP is simple. If anything,unfortunate should happen to you, your nominee will get the death benefit. The death benefit is the sum assured of the policy or the fund value, whichever is higher. For the investment component, there are several factors that can benefit an investor.They are:

High returns

When compared to traditional investments like fixed deposits (FDs) or recurring deposits (RDs), ULIP easily provides high returns. One of the ULIP benefits is that you can choose from several funds. Based on your ability to take risks, financial goals, and stage of life, you can choose a fund that meets your needs. Equity funds are a high-risk option that offers high returns. While debt funds are safe investments that offer low returns. Whereas, if you are afraid to take risks but are interested in equity funds, you can simply choose a balanced fund. Balanced funds invest half of your money in equity funds and the other half in debt funds.

Saving habits

Everyone has several responsibilities and liabilities to take care of when they get their paycheck. It becomes difficult to put money aside every month for long-term savings. Prolonging your investments may hamper your financial goals in the long haul. Buying ULIP insurance ensures that, along with insurance, you also invest money in funds from the premiums you pay. Ensure that the coverage and fund amount you are investing suffices for your financial objectives when your ULIP matures.

Flexibility

Most investments do not permit you to change your investment allocation. However, this is one perk of ULIP. You can switch between debt funds and equity funds anytime you want within the duration of your policy. By tracking the market fluctuations, you can increase your returns by switching your allocation. Also, over the years, your risk-bearing capacity may increase or decrease. In such cases, what a ULIP policy does is that it allows you to switch your fund allocation. The ability of a ULIP to switch between funds proves quite helpful for the long haul.

Free partial withdrawals

Life is uncertain and there may be a time when you may have to access your investments for funds urgently. Most financial instruments require you to pay charges or dissolve the instrument altogether for unexpected withdrawals. The lock-in period of ULIP insurance is 5 years. After that time, you can withdraw funds from your ULIP anytime. It offers these partial withdrawals for free. This is a useful feature, as you can use the partial withdrawals of your ULIP whenever you need funds urgently.

Tax benefits on premiums

A ULIP has two components: investment and insurance. ULIP benefits for tax-exemptions are on multiple levels. When you buy a ULIP, your insurer partially invests the premiums you pay in investment funds and partially provides a life cover. The premiums you pay for your ULIP are exempt from taxes as per Section 80C of the Income Tax Act. The tax benefits can be availed up to Rs. 1,50,000 annually.

Tax benefits on maturity

The tax implication of investment is a major factor to consider before buying it. Apart from the premiums of your ULIP, the maturity amount is also exempt from taxes. According to section 10 (10D) of the Income Tax Act, the maturity amount of your ULIP policy is exempt from taxes. This is subject to certain conditions on the investment and allocation front. Also, the death benefit received by your nominee in case of your sudden demise within the policy duration is tax-free, too.