Not everyone has the time and skills to manage their financial portfolio optimally. For such customers, ULIP provides an effective way to participate in the market as well as an insurance cover to deal with uncertainties of life.

Insurance, investment and saving for emergencies are the three core elements of any sound financial plan. Traditionally, customers are advised to keep these elements separate from each other to provide the necessary commitment to each. However, not everyone has the time and skills to manage their financial portfolio optimally. For such customers, Unit Linked Insurance Plans (ULIP) provide an effective way to participate in the market as well as an insurance cover to deal with uncertainties of life.

However, ULIP is always pegged against a combination of term plans and mutual funds. Over the years, many experts have tried to address this holier than thou debate. Let us understand these products in detail and what suits you better.

On the one end is a term plan that offers a life cover, which acts to provide a lump sum should the unfortunate event occur, once the breadwinner of the family is no more. Though it has no investment component, it covers your nominee for the duration of the policy without any changes in the premium. Also, the offered benefit can be enhanced by clubbing the basic policy with notable add-ons such as Waiver of Premium, Critical Illness Rider, Accidental Death Benefit, Return of Premium etc.

On the other end, ULIP bridges this gap by providing dual benefits of life insurance and a low-cost way to participate in the financial market to accumulate wealth. A part of its premium goes towards buying a life cover while the rest is invested in equity, debt, or a combination based on one’s allocation based on risk appetite.

The three golden rules of accumulate wealth while having life cover:

1. Do not put all your eggs in one basket: Having a diverse portfolio is like is a risk management strategy that mixes a wide variety of investments within a portfolio. The strategy of constructing a portfolio of different kinds of assets will, on average, yield higher long-term returns and lower the risk of any individual holding or security.

Similarly, Term Plans and ULIPs serve different purposes, and therefore, you should not pick one over the other. Adding both to your financial portfolio will not only help you secure the financial future of your family but also build a corpus for your retirement and other future needs. That is why it’s wise to supplement your Term Plan with a ULIP, or vice versa.

2. To accumulate wealth with the power of switching between fund options:  ULIP Plans allow policyholders to switch between multiple fund options like equity, bonds and hybrid funds, whenever they want, free of charge. Policyholders can choose to allot future premiums between different ULIP funds basis the prevailing scenario, for example, with an all-time high Sensex, one can safeguard a part of their windfall gains by moving it into debt segments.

One can also alter the allocation of future premiums from equity to bonds or vice versa to take advantage of the market movements. It all comes down to research and choosing the funds wisely, ULIPs may provide substantial returns from the market provided you have stayed invested for a long term. This offers much-needed flexibility.

3. Tax efficiency: ULIPs are considered tax-efficient instruments in comparison to Mutual Funds as they help policyholders save taxes in all phases. In ULIPs, switching between funds is permitted without any tax implication whereas in Mutual funds, switching between schemes has tax implications.

ULIPs, besides providing tax advantage while switching funds also helps in income tax up to Rs 1.5 lakh under Section 80C of the Income-tax Act, 1961. Under Section 10(10D), even the maturity amount is tax-free should the annual premium is lower than Rs 2.5 lakh.

ULIPs offer an investment option that can straddle multiple financial needs and goals and cater to the core concern of capital growth and life insurance. This makes it a lucrative option for your portfolio, especially if growth and protection are your priorities. Just as you multitask to make ensure a comfortable life for you and your loved ones, a ULIP multitasks to ensure your life goals are fulfilled.

• Financial Express
• 29/09/2021