10 Reasons why ULIPs can help you save for the long term

A ULIP (Unit Linked Insurance Plan) is a combination of investment and insurance which helps people claim a tax deduction under Section 80C of the Income Tax Act. So, when you get a ULIP, some of your money will be pooled into life insurance, and the remaining will be put into an equity fund or a debt fund or both, depending on your needs. Let us look at the reasons why investing in ULIPs are a good option for you and how they would help you save for the long term.

1) Longer lock-in period

ULIPs have a lock-in period of 5 years, and since that is a pretty long time, it will help in inculcating a disciplined investing habit in you. Also, as the lock-in period is long, investing in a single ULIP plan would be enough. You only need to buy it once, but you can claim the tax benefits every year until the term is over. This is unlike an ELSS which has a lock-in period of 3 years, but the investor can only claim the money invested in the first year, in the fourth year. In ELSS, every investment, be it monthly or as a lump sum amount or through SIPs (systematic investment plans) can only be taken out after the term completion of the whole of 3 years. With ULIPs, the lock-in period will be calculated from the date where the policy was issued. In ULIPs, the investors can pay the premium either every month or on an annual basis, as a lump sum.

2) ULIPs are flexible and a safe investment plan

When you compare ULIPs with mutual funds, ULIP is going to be the clear winner! Here is why: Mutual funds are extremely specific investment schemes where each of them will be investing in a specific sector or a specific type of market cap. For instance, an equity fund invests in shares or stocks or other equity related instruments. So, in cases where the stocks wouldn’t fetch results that are expected, this will affect not only the mutual fund but also the investor directly. In the case of ULIPs however, this wouldn’t happen. Here the money is proportionately distributed across equity funds and debt funds, with a clear-cut objective. Since ULIPs are a flexible investment option and are managed by fund managers, they can choose to distribute the investment in whichever sectors they find safe and also think would generate maximum returns. This makes ULIP a very safe investment plan.

3) ULIPs provide tax benefit under Section 80C

If you pay your premium annually in a ULIP, they are eligible for a tax deduction of up to 1.5 lakhs according to Section 80C of the Income Tax Act. Hindu Undivided Families can even avail this tax benefit. Under Section 80D, tax benefits can be availed for a life insurance ULIP policy, up to 10% of the sum that was assured before. Also, the Maturity Benefit or the amount that you gain on partial withdrawal is not subject to any taxes. For ULIPs that were taken for retirement, the computation amount of one-third of the fund value is free of taxes under Section 10A of the Income Tax Act. Moreover, ULIPs help you save on long term capital gains which are another benefit that mutual funds don’t have.

4) ULIPs have better returns

When compared with other insurance products, ULIPs generate better returns because of its equity benefit. As mentioned before, ULIPs take the amount invested by you and invest them in various asset classes, using different funds. Although tax saving funds

have given double-digit returns in the past, you need to search for a new fund every year, in case yours is a one-time investment. However, or ULIPs, the renewals would cover tax savings. So, the maturity amount of a ULIP plan is dependent on the performance of the equity market during the year. As mentioned before, the maturity amount that the policyholder receives is not subject to taxes. This is why ULIPs are a better choice compared to other insurance products. You might be thinking of tax-saving fixed deposits which come with a lock-in period of 5 years too. However, these returns will be added to your income, and they will be taxed accordingly.

5) Dual Advantage

Although there are many insurance plans out there that provide your life cover and offer a way for tax deductions, they do not generate returns, unlike ULIPs. ULIPs, along with the benefit of tax deductions up to 1.5 lakhs, is very helpful for long term goals. It offers you the minimum sum assured which is equal to ten times the annual premium for investors who are under 45 years of age.

6) ULIPs provide flexible switching options between funds

Since ULIPs don’t have that many options when it comes to investment funds, market caps and asset classes, investors can switch between funds throughout their investment cycle. This further secures the ULIP investments against changes in the market and improves performance. Unlike ULIPs, mutual funds aren’t flexible, and one will have to exit from a scheme and switching completely isn’t possible.

7) Cheap fund management charges

Earlier, ULIPs had high charges that were deducted from the premium value or adjustment in the net asset value or units would be deducted from the policyholder’s account. In 2010, all this changed and ULIPs are a cheaper option when compared to mutual funds. While fund management charges for mutual funds are fixed at 2.5%, it is 1.35% for ULIPs.

8) Easily Available and Less Cost

You can easily purchase ULIP plans online, and because of this, they incur less cost than the traditional method. This way, you can pay a lesser fee than what you would normally have. This will include premium allocation and policy administration charges and fund management fees.

9) Loyalty benefits to policyholders

ULIPs have a Loyalty Units feature which rewards the customers with additional units if they maintain a consistent record of making their premium payments in time. This is something not offered by mutual funds.

10) Additional Riders Available

Since a ULIP plan is an investment and insurance plan, it has the provision for add on riders like critical illness benefit and accidental benefit. These riders can be purchased along with the ULIP plan.