ULIP for a beginner is good, as it exposes you to equity and debt investment instruments. Asset allocation is an another important aspect.
Let’s check an Example
Vinay, 25 years of age is a working professional in an MNC. He has started his career and feels that financial planning is important. He asks his family and friends about how to make the most of his investment.
Few say about his friends make an investment directly in stocks, some others advise him to buy a mutual fund, a health insurance and a life insurance. Others tell him to open a recurring deposit and a PPF account.
With so many opportunities to invest money in, he decides to insure his life in the first place and buy himself a life insurance. So, he finalises on a ULIP and decides to buy one.
But, due to the vast array of investment options available these days, he is still confused about his decision. And questions whether it was the best available option for an investment as a beginner.
You might have also been in a fix while starting with your investment decisions. Let us know more about ULIP and their set of advantages and disadvantages.
ULIP or Unit Linked Insurance Plan is an investment tool using which a premium amount is invested in the equities and debt market at a set frequency.
The main purpose of this plan is to provide insurance as well as make investments to ultimately provide desired maturity proceeds.
Insurance + Investment
ULIP’s provide the benefit of investment as well as insurance coverage to the investor. The premium is divided into 2 parts, wherein one goes as a mortality charge towards insurance and the balance is invested in equities, stock or bond market.
A ULIP helps attain the goal of reaching the corpus funds by investing money in high-return stocks, which have the capability of yielding great returns over time.
Risk taking capability
Early age enables you to take more risk as you would have fewer responsibilities to take care of. Also, your investments have a huge time spectrum, which helps you yield the desired results. The investments sail through the ups and downs of the market and enjoy the power of compounding.
ULIP’s enjoy tax exemption under the Income Tax Act, 1961.
- Premiums exempt u/s 80C
- Maturity proceeds exempt u/s 10(10D)
- Proceeds received due to death of policy holder exempt u/s 10(10D)
However, the premiums are subject to a maximum of 10% of the sum assured. Any amount above the 10% limit will not be allowed as deduction u/s 80C.
This is one of the best features of a ULIP, wherein the investor can switch funds between equities, or debt market depending upon the market’s sentiment. If the market is uncertain, you can switch your investments towards debt and once it stabilises, you can get it back to the equities market.
The capital gains arising out of switching of a fund is exempted from income tax.
ULIP’s are ideally suited for long-term investments, that is, 10 years or more than 10 years. Considering you have a 3-year-old child, you can buy a ULIP for his higher education purposes. The purpose of investment should not be short term or medium term, but it should consider long-term goals.
Initially, ULIP’s had a lock-in period of 3 years, and the investor could stop paying the premiums after the lock-in period and the policy would not lapse. However, new guidelines were issued in 2010 which has:
- Increased the lock-in period to 5 years from the existing 3 years
- Mandated the payment of premiums till the policy matures
Though ULIP’s provide the flexibility of switching funds between equities and debt, an underperforming plan will cost you dearly as you cannot change the ULIP scheme from one to another.
So, with the above points, Vinay has definitely taken a right decision to buy a ULIP plan which will enable his investment to grow by leaps and bounds. Since he is a beginner, the age factor works in his favour and fewer responsibilities increase his risk-taking attitude.
Though, before buying a plan, remember to compare them with other plans offered by different companies. You can compare policies online with the help of various websites, which provide you with updated information regarding the plans and policies of various insurance companies.