Unit-Linked Insurance Plan (ULIP) is a combination of insurance and investment. It provides you with life insurance and allows wealth creation to meet long-term goals. Here is how a ULIP policy works to offer these dual benefits.
How Does a ULIP Work? When you put money in a ULIP, a part of your premium payments goes into providing you with a life cover. The remaining is used to invest in shares, bonds and other securities to provide returns. Fund managers of the insurer manage your investments and so, you need not deal with the hassle of tracking the same. To choose the best ULIP plan, check its performance over the last 10 years. Benefits of the Insurance Segment of a ULIP Get a life cover: This is the first major benefit of this plan. In the case of an eventuality like the insured's untimely demise, the nominee receives an amount called the death benefit. Save on tax payments: The premiums that you pay towards a ULIP policy qualify for a tax deduction of up to ₹1,50,000 in a year, as per Income Tax Act, Section 80C. Moreover, the returns received once the policy matures are not taxed under Section 10 (10D). Benefits of the Investment Segment of a ULIP Finance long-term goals: ULIP is recommended for long-term wealth generation since it works with the power of compounding to grow your returns manifold. Therefore, it can help meet various long-term goals like financing your child's higher education, marriage, a new car, a new home, retirement and so on. Even if you exit after the lock-in period of 5 years, your net returns will be usually more than if you had invested in a savings or FD account. Switch funds to invest flexibly: Under the investment section of a ULIP, your money is put in debt and equity funds. When you wish to take a higher risk for more returns, a larger part of your money can be invested in equities. When you have a low-risk appetite, you can switch to debt funds. Else you can invest in hybrid funds to balance your risk. You can also switch between funds based on how the market performs. Best ULIP plan providers allow a few switches free of cost. Factors to Consider Before Investing Preference: If you prioritise wealth creation over life insurance, you can put more money into the investment component of a ULIP. Risk appetite: This is important to choose the kind of funds your investment portfolio will majorly comprise. Investment horizon: Since a ULIP policy has a 5-year lock-in period, if you surrender it in the first 3 years, the insurance coverage would stop right away. But the surrender value can be provided only after 3 years. Now that you know how a ULIP works as an investment-cum-insurance tool, consider choosing a reputed insurance provider and pick the best ULIP plan that they offer. Remember to read all the terms and conditions of the plan before you start investing in it.
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