If you have financial dependents, it is important that you avail the coverage of a life insurance policy. It ensures, to a great extent, that there are enough funds to take care of your loved ones in the unfortunate event of your demise. However, many investors these days, want to avail multiple aspects of financial planning when they buy one product. For those who search for a product that encompasses life insurance and investment under one window, a ULIP can be a perfect choice. If you are wondering “Why should I invest in a ULIP?”, the answer lies in the double benefit it offers- the security of an insurance product and the returns from equity-linked investment.
To make the most of this benefit, it is essential to choose the right ULIP plan that is in accordance with your portfolio.
How does a ULIP work?
The insurance companies that offer ULIP plans use a specific portion of the ULIP policyholders’ premiums and pool it together to invest in financial securities. The process is similar to that of mutual funds, except that in a ULIP, a considerable portion of the premium is used to build the life cover as well. Based on how the market performs or the interest rates fluctuate over a period of time, you receive the returns on your funds. The premium of your ULIP is mainly decided as per the life cover you want and the amount you wish to invest in a specific asset class. One can also estimate the premium of their ULIP plan with the help of a ULIP calculator.
Selecting the right ULIP as per your portfolio
- Understand your risk appetite
There are various investment options for each type of risk appetite. One of the most beneficial features of ULIPs is the wider variety of investment options it offers, namely equity funds, debt funds, and a combination of both. Even within equity funds, you can select from high-cap funds, mid-cap funds, low-cap funds, and so on. However, one must thoroughly consider the risk they are willing to undertake in terms of their investment. Equities bring in higher funds, but they also involve a higher amount of risk. Debt funds involve very fewer risks and are, therefore, a good option for risk-averse investors who are comfortable with relatively low returns. The return estimates from the ULIP calculator can greatly help you in making the right selection.
- Review your personal financial objectives
ULIPs are ideal for people with short-term as well as long-term financial objectives. Before you introduce a ULIP plan to your portfolio, take a good look at your financial objectives for the future.
What are some goals you are looking to meet in the next 5 years and then in the next ten years and so on? Some may want to buy a home or a car. Some may want to send their child abroad for higher education or arrange a grand wedding, while others may have retirement goals in mind. Understanding the costs of these goals will help you get a deeper idea of why you should invest in a ULIP and how you can benefit maximally from it. You can then select a ULIP plan with the kind of fund performance that will allow you to reach your goals with the right amount and at the appropriate time.
- Evaluate your life coverage needs
If you are looking at a ULIP plan as your primary life insurance policy, then ensure that the plan meets your coverage needs completely. To complement your life cover with additional protection, you can also opt for additional riders such as waiver of premium, critical illness benefit, accidental permanent disability benefit, and so on. These may increase your premium by a bit, so consider the premium amount for the long term before you go ahead. ULIPs tend to have slightly higher premiums due to the many benefits they offer. However, this should not deter you from choosing a high life cover amount.
- Take your tax strategy into consideration
Adding ULIPs to your portfolio will hike your tax benefits considerably. ULIP premiums can be claimed as tax deductions up to Rs 1.5 lakhs as per Section 80C of the ITA, 1961. The pay-outs from the policy are tax-exempted too. If you have invested in any other tax-saving instrument that provides 80C deductions, then plan your premium amounts such that you are able to maximise the tax benefits on each instrument.
Tax benefits are subject to changing tax laws. Terms and conditions for each benefit may also apply. Reach out to a tax expert or a financial consultant to curate a ULIP plan that meets your needs.