What makes ULIPs work in India?

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A Unit Linked Insurance Plan (ULIP) is a type of life insurance that has an investment element to it. When ULIPs were initially launched, there were several myths associated with them. This made investors wary of buying a ULIP. The notions changed as people increased their understanding of ULIPs and became more aware of their benefits. The moment investors realized the true potential of a ULIP, its popularity eventually rose. Here is what makes ULIPs work in India:

Accelerates wealth creation

ULIPs are designed for the long haul and those who have invested in them accordingly have achieved great returns. Based on your financial goals, there are different ULIPs you can choose from. Whether you are investing to buy a house or save for your retirement, you can choose the tenure and fund allocation accordingly. The returns on ULIP are often higher than traditional investments for the long haul. This makes an interesting case for why you should invest in the ULIP for the long term.

Provides financial security

Being life insurance at its core, ULIP’s benefits include providing financial cover to the policyholder. The insurance component ensures that, in case of your sudden demise, your familywill be provided with a sum assured. With the uncertainties in life, it is important to have this financial blanket for your dependents. The plan is designed in a manner that takes care of you and your loved ones’ future.

Offer high returns through compounding

Several people who are afraid of investing in equity directly prefer to do it through ULIPs via fund managers. ULIPs easily offer high returns on their equity investments. In the long haul, this is further speeded up through the power of compounding. Over the years, investors not only earn interest in their investments but also in their past returns. The investment provides higher interest than FDs and is safer than direct equity markets, so this is why you should invest in a ULIP.

Offers flexibility with ease

When you invest in a policy such as a ULIP, you get to choose your fund allocation based on your risk appetite. While there are several types of funds to choose from, they can be broadly divided into three categories: equity, debt, and balanced. Equity funds provide high returns for the risks that you take, so they would be a good choice if you can take risks. If you are looking for investments that are low risks, you can invest in debt funds where your money is safely invested in corporate and government bonds. If you are willing to take some risk, but not completely, balanced funds would be ideal. With them, your money is partly invested in equity and partly in debt.

Usually, once you have invested in a fund, your money is locked till maturity. Whereas, with ULIPs, you can switch your fund allocation from debt to equity and vice versa anytime you want. ULIP benefits multiply with the ability to switch funds as it helps you to make the most of market allocation.

Tax benefits on multiple levels

The way ULIP has been designed, one can enjoy tax benefits at different stages of the investment. The premium that you pay for it is exempt from taxes under section 80C of the Income Tax Act. Annually, you can claim an exemption of up to Rs 1.5 lakh on the premiums you pay. Also, the amount received when your ULIP matures is also tax-free, subject to certain conditions. This is under Section 10 (10D) of the Income Tax Act.

Allows free partial withdrawal

ULIPs come with a lock-in period of 5 years. After that tenure, one can avail of free partial withdrawals. The amount of withdrawal is subjected to the terms and conditions of your policy. This feature comes in handy for individuals during times of emergency. Most investment options either charge for partial withdrawals or require you to surrender the investment completely. While a ULIP policy allows easy access to funds after the lock-in period whenever needed.

In India, in earlier times, people used to buy traditional investments, even with their low interests and lack of flexibility. With investments cum insurance products like ULIP, they are receiving several benefits on multiple levels. This has led to the increasing popularity of ULIPs in India.