“A simple fact that is hard to learn is that the time to save money is when you have some.”- Joe Moore.
You keep thinking and planning your expenses with the money you have or have not earned all your life. Isn’t it?
In your mind, you know the events when you would want the lump sum of money. Then, when you evaluate your earnings compared to the expected costs you will incur, you know how much to save. If you realize that you cannot afford the outlay with the available amount of money, you can keep the only thing you can do to manage expenses.
When saving, only keeping aside money in your locker will not help you multiply your earnings. True? This is why you need to invest your hard-earned income portions in financial instruments like ULIPs (Unit Linked Insurance Plans). If you are not aware of a ULIP, then further reading is a must for you.
Aditya convinced Siddharth to save and invest money through ULIPs. Siddhartha was worried to collect money for his daughter’s higher education as he had a big family to take care of. The conversation below will take you through the common perception in the minds of the people.
Siddharth: Hey, Aditya, can you tell me any way to save money in which I get a life cover and an investment option with higher returns?
Aditya: Yes, sure, why not? Have you tried ULIPs? They are very popular and comparatively better than term plans.
Siddharth: ULIPs, who would take that risk, bro?
Aditya: Why not invest in ULIP when you can save more than anything else in this product?
See, ULIPs are better, and you need to understand the reality of this financial tool.
What is a ULIP?
ULIP is commonly known as Unit Linked Insurance Plan. This product is a perfect combination of insurance as well as investment. Ideally, you cannot save money and create wealth out of it unless you invest your money. But, if you buy a ULIP, you get the chance of wealth creation based on your choice of investment.
What happens when you invest your money in buying a ULIP?
After buying a ULIP life insurance policy, a part of the premium is dedicated towards your life cover. The other half of the premium is invested in different funds that include equity, debt, or a combination of both. With ULIP, you are allowed to choose to put the money in the fund of your choice. But the amount of return will depend on the performance of the fund you select.
When you get good returns after putting in money for years, it gives you relaxation. Though there is a misconception that ULIPs are risky because they are market-linked investment tools. But the fact is that in ULIPs, the returns are higher from the amount you can save traditionally otherwise as:
- The investment is made over a long period.
- You have the freedom to put your money in high performing funds.
You must wonder why we are just talking about ULIP here when there are other investment options. The best answer to this is that ULIP is a combination of security. It provides you life insurance with death benefits as well as opportunities to invest.
Let us look at other options where ULIP can provide you with benefits.
Why not invest in a Unit-Linked Insurance Plan?
Investment is to make a volume of wealth to accomplish your future goals. Therefore, the amount of money you will invest today will indeed be multiplied in future. If you believe in this concept and wish to try investing money in ULIPs, know that it can be a good decision in life. Let us see how.
- Dual Benefits with one investment tool: ULIP is the crucial financial tool in India that offers benefits of investment and life cover. You do not have to worry about a separate insurance policy. The minimum life cover provided under the policy is 10 times your annual premium amount. But this amount of cover you choose can be 40 times the yearly premium or higher.
- Invest in ULIPs to get tax deduction benefits: Make an investment in ULIP and get eligibility for tax exemptions under section 80C of the Income Tax Act. The maximum amount of tax exemption that you can get under ULIP is Rs.1,50,000 lakhs. Though the investment amount can be higher, the tax exemption will be given on Rs.1.5 lakhs only.
Apart from the invested premium amount, the returns on the maturity of the ULIP is also eligible for tax exemption under section 10 (10D) of the Income Tax Act. The amount received by the nominee of the policyholder on the policy’s maturity is also exempted from deductions under section 10(10D) of Income Tax.
- Liquidity: You are investing money because you look for an option of partial withdrawals or complete fund withdrawal when you need the money. Isn’t it? ULIP allows you to have partial withdrawals of cash at essential stages of life, Like if you need a good amount of money for your child’s admission at the time of 10th, 12th, or graduation, you can immediately take care of these expenses. Other than the fees, you can withdraw the money for vacations, family emergencies, and more. The withdrawal, whole or partial in any case, is allowed only after the completion of the lock-in period.
- Goal-based planning: When you talk of saving money, you are very clear with its purpose. Objectives help you design your goals for which you can strategically invest your money in the funds. Speaking of ULIP, the investment is ultimately your choice after assessing the returns on different funds.
- The flexibility of Investment Options: ULIP is the only financial instrument that gives you the freedom to invest money. You get the flexibility to:
- Switch between different funds: You can switch your investment money from one fund to another. You can put your money from equity to debt and from debt to balanced funds based on the returns. Investment depends on your risk appetite that defines how much money you can put in. If you are a risk-averse investor and want stable income returns, you must put money in debt funds. Whereas those who are risk-takers can invest the money in equity.
- Premium Redirections: Premium redirections offer complete flexibility to you where you can redirect your future premiums into funds of your choice.
- Top-Up Option: You get a chance in ULIPs to put your lump sum money in your existing funds. When the amount of investment increases, the probability of returns also rises.
- Assured Death Benefit: Similar to other insurance plans, ULIP also guarantees a death benefit. This implies that your nominee will receive the sum assured if you lose your life during the policy term. The total amount received by the nominee will be exempted from tax deductions.
ULIPs offer you a comprehensive benefit that can motivate you to make investments as much as possible. The amount of return excites the policyholder and assures them of return. Still, some confuse the investment alternative and consider it an unsafe option as ULIPs are linked to market risks.
After Siddharth was convinced with investing in ULIP plans, he asked, “Aditya, when is the best time to invest in a ULIP? Siddharth’s intention was to draw maximum returns. To this, Aditya replied:
- “ULIPs are investment products that fetch you results after putting in money for an extended period. You can start the moment you think of savings.
- ULIPs have a lock-in period of 5 years, and you will be able to withdraw money only after this span. The withdrawal allowed will be partial; hence you must plan the execution keeping in mind your financial requirements and how you plan to take care of them. If you know that after 5 years, your daughter will be taking admission in the college, then start for it now. The withdrawal from the ULIP can help you take care of the expenses. The 5 years period is a considerable time to expect returns after investing money in debts or equity funds.”
If your requirement is the same as that of Siddharth, the answer remains the same. However, in other cases, these are the times when you should invest in the ULIPs:
- If you have just started your career and think that you cannot absorb higher investment risks, you can start small. Try putting in small portions of money and that too in balanced fund options. When later, you gain income stability and think that you can put more money, you have the opportunity to shift to the equity funds. Though putting your income portions in equity is riskier but the return on it is higher.
- ULIPs are an excellent option for those who will soon be retiring. So if you fall in that bracket, now is the time to buy a ULIP. The product can take care of your or your family’s requirements.
- The best time for the youngsters to buy a ULIP is when they start earning or are planning to get married soon. When you start your family, the responsibilities rise soon. Putting in your money, you will have accumulated a sum to pay off your financial requirements.
In case of an untimely death, your nominee will get the death benefit under ULIPs. In addition, a specified sum assured is given to the nominee to handle the financial burden.
The recent development in ULIPs which you should take care of without stopping the investment are:
- If the annual premium of ULIP is more than Rs.2.5 lakhs, the returns (maturity proceeds) will no longer be exempted from tax as per section 10(10D). The maturity will be treated as capital gains and charged for tax under section 112A.
- Whether invested in debt funds or equity funds, the long-term capital gains above Rs.1,00,000 shall be taxable at the rate of 10% without indexation under section 112 A.
- On the other hand, the short-term capital gains are taxable at 15% under section 111A.
- There will be no tax implications when you switch from one fund to another.
Best Companies from which you can buy a ULIP.
- Aditya Birla Sun Life Insurance Company.
- Bajaj Allianz Life Insurance Company.
- Max Life Insurance Company.
- HDFC Life Insurance Company.
- ICICI Pru Life Insurance Company.
Despite the tax implications, ULIPs remain an attractive option without a doubt. The question of why not to invest in ULIP can be marked answered as there are multiple benefits that the product offers. It is favourable for those who invest in small portions and that too for an extended period. The long term investors have benefited from loyalty additions and fund boosters also. In addition to this, the ULIPs pay mortality charges at maturity to push overall returns to a higher mark. Make sure you consult a specialist before investing your money. For the complete details about a ULIP plan, visit here.
Raj Kumar is a qualified business/finance writer expert in investment, debt, credit cards, Passive income, financial updates. He advises in his blog finance clap.