When you are looking for investments for the long haul, one major factor you must consider is the returns. Earlier people simply opted for recurring deposits (RDs) or fixed deposits (FDs). However, these investments failed to keep up with the rising inflation. This lead to individuals searching for investments that offer high returns in the long haul. One such investment that has gained popularity over the years for its returns is a Unit Linked Insurance Plan (ULIP).
ULIPs are long-term financial instruments that provide a life insurance and investment component in one plan. When you buy a ULIP insurance, the premiums that you pay for it are partly used towards providing life cover and partly allocated to the funds of your choice. In case of your sudden demise within the duration of the policy, your nominee will receive the sum assured. This ensures that in uncertain times there are funds available, on which your dependents can rely. The investment component enables wealth creation in the long haul. Investors can choose their fund allocation, and when their ULIP insurance matures, they receive their investments along with the interest earned on them. In the investment aspect of ULIPs, they provide high returns with ease in the long haul.
How do ULIPs provide high returns?
With any investment, there are several factors that influence it. Here are the benefits associated with ULIP as an investment, that enable it to meet the needs of the policyholder:
- Meets the needs of any and every investor
Every individual looking for investments has a risk appetite that they take into consideration. Their risk appetite helps them filter investments and narrow down their choices. ULIP insurance offers several types of funds catering to the needs of every policyholder’s risk appetite. In case you are looking for safe investments, you can invest in debt funds. If you can take risks, you can choose equity funds. If you are looking for a balance in your risk appetite, there are balanced funds. They are a mixture of both, debt and equity. They offer moderate returns for the moderate risks involved.
- Offers flexibility of switching allocation
When you buy a ULIP, there is a fund allocation that you select based on your risk appetite. According to the different stages of life, your risk appetite is likely to change over the years. One of the biggest ULIP benefits is that it allows you to alter your fund allocation anytime you want. It allows you to switch from debt to equity and vice versa anytime during your policy tenure. Since ULIPs are directly linked to the market as an investment, the flexibility to switch your allocation allows you to make the most of the market fluctuation. It is a rare feature of a ULIP, which has proven advantageous for investors to create high returns over the years.
- Compounding benefits
When you invest in a ULIP, the recurring premiums you pay are invested in the funds of your choice. Since ULIPs are designed for the long term, eventually you will see your investment compounding. Compounding is when, along with your investment, you also earn interest on the previous returns. The longer you keep an investment, the more you will benefit from compounding. ULIP benefits other than compounding also allow policyholders to invest in a disciplined manner over the long haul. Having a consistent and disciplined approach ensures that small savings over time lead to a huge investment corpus.
- Tax benefits
When you are looking for investments, one major factor to consider is its tax implication. What a ULIP policy does is that it offers tax benefits on multiple levels. Since it is a type of life insurance, the premiums you pay for it are exempt from taxes under Section 80C of the Income Tax Act. Along with it, the sum assured of the life insurance is also tax-free. Even the maturity amount that the policyholder receives is exempt from taxes, subject to certain conditions.
ULIPs are known for their high returns (as compared to the returns offered by traditional investment counterparts). Along with it, the flexibility of switching allocation enables investors to alter their decisions. It helps them to achieve their long-term financial goals while providing security with life insurance.