ULIP Meaning Simplified: How to Use It for Long-Term Wealth Creation?
As a young individual who has recently started earning, you must have gotten the advice of investing in the right plan and getting reliable life insurance. Exploring various financial products may seem daunting, especially when you are already planning to go to your dream destination or treating yourself with a luxury gift.
But is it possible that you get to uptick more than one box by making a single investment? Yes, this is, thanks to ULIPS. ULIPs have emerged as a popular investment opportunity because of the wide coverage and affordable premiums. Sounds interesting? Keep reading as we give you an insight into ULIP meaning and their efficiency in creating wealth in the long term.
What are ULIPS?
ULIPs or Unit Linked Insurance Plans are designed to offer dual benefits of life cover and investment in the funds of your choice. In a ULIP, the amount you invest is divided into two portions: one is allocated to life insurance coverage, while the other is invested in the funds of your choice. What makes ULIPs an attractive opportunity is that in addition to getting life cover, you get the chance to earn through market-linked investment funds.
Generating wealth in the long run with ULIPs
Generating wealth through ULIPs is an attractive option if you want a relaxed yet profitable investment option. Here are the benefits of ULIPs that facilitate wealth creation in the long term:1
- Potential for high return
ULIPs allow you to invest in funds that have the potential for high returns, like equity funds. Depending on your risk appetite, a portion of the amount you put in can be invested in equity funds. What makes them a reliable option is that equity funds accept lower investment amounts and have better potential for returns compared to traditional fixed-income investments. 5
- Investment in the long-term
A prominent aspect of ULIPs is that they are designed for long-term investment. Usually, ULIPs come with a lock-in period of 5 years.4 This ensures that you are engaging in a more disciplined savings scheme. Simply put, the money you invest through ULIPs cannot be withdrawn before the expiry of the lock-in period.
- Power of compounding
ULIPs have emerged as an attractive option for many investors as they offer the power of compounding. The power of compounding is the ability to generate profit not only from the principal invested amount but also from the accumulated profits earned. This means that the returns you earn from investment through ULIPs get reinvested in a potential fund to keep the cycle going and ensure rapid wealth creation.
- A wide horizon of funds
You must have heard that the key to a successful investment portfolio is diversification, i.e., investing in different types of funds. ULIPs provide you with exactly that. You can invest in a fund of your choice, including equity funds, debt funds, cash funds etc. 3 Additionally, ULIPs also allow you to smoothly modify and switch funds depending on the market trends and fluctuations.
- Tax benefits
Whether you are a salaried employee or entrepreneur, exploring tax benefits must be on your list. Investment in ULIPs ensures that you do not have to look forward. Under section 80C, you can avail of tax benefits up to ₹1.5 lakhs/ annum on the premium you pay. Not to forget that under section 10(10D) of the IT Act, the maturity amount is also eligible for tax exemptions under specific conditions. 2
Exploring ULIPs for wealth creation
Now that you are on board with investing in ULIPs let’s take a quick look at the types of ULIP plans mostly offered by insurance companies:1
- Debt funds
A debt fund is a type of fixed-income security that is ideal for investors with a low-risk appetite. Debt funds include bonds, debentures etc. - Equity funds
An equity fund is a type of investment fund that spreads your money across different types of stocks. It is also known as equity securities. - Liquidity funds
The low-risk funds in a ULIP, commonly referred to as cash funds or money market funds, are tailored for cautious investors. These funds primarily invest in short-term market instruments such as bank deposits, commercial papers, and treasury bills.1 - Balanced-funds
Imagine enjoying the benefits of stocks and the stability of debt funds. This is what balanced-fund ULIPs are designed for. With a single investment, your money is invested in a fund featuring the benefits of both stocks and debts.
Summing up
Unit-linked insurance plans can be beneficial for creating wealth in the long term while also ensuring life coverage in case of an unfortunate event. However, before you choose a ULIP, make sure to evaluate factors such as fund performance, flexibility in switching investments, charges and insurance coverage to leverage the utmost benefits.
