Financial management and planning are a must for everyone, whether married or single. Single individuals need to save and invest for achieving their individual goals while taking care of their dependents. While several investment options can help singles achieve their long-term financial goals, ULIPs offer the dual advantage of insurance cover as well as wealth creation. Let us understand what is a ULIP policy and what makes it a good choice of investment for bachelors.
What is a ULIP Policy?
The answer to what a ULIP policy is as follows –
A ULIP policy is an insurance plan that also offers policyholders the opportunity to create wealth by investing in financial instruments. The policyholder pays a premium which can be a one-time payment of a monthly or quarterly or half-yearly or annual payment. One portion of this premium is used for the insurance cover while the other part is invested in stocks or debt or liquid instruments or a combination of them.
Some main features of a ULIP are:
- They have a lock-in period of five years, which ensures that a policyholder has to mandatorily invest during that time. This inculcates the habit of systematic and disciplined investing.
- Different types of ULIP schemes with different investment plans are offered to allow investors to choose the plan that matches their goals and riskappetite. Investors can choose from ULIP schemes that invest in only equity or debt or a combination of the two or any other instrument specified beforehand.
- The investment is handled by professional fund managers.
- Investors have the option of switching their investment funds from one instrument to another.
- Investment in ULIPs involves certain extra charges related to fund management, surrender charges on premature surrender of the policy, switching charges, and partial withdrawal charges. The total ULIP annualised charges have been capped at 2.25% for the first ten years of holding.
- Premium on Investments in ULIP, plus the maturity or the assured amount, is tax-exempted.
Some Reasons to Choose ULIP
Some reasons for choosing a ULIP scheme are:
- Provide Insurance Cover Plus Returns– Investment in a ULIP allows a policyholder to earn some good returns through investment in various instruments besides providing financial stability to the family in case of an unfortunate event or happening. Investors in ULIP stand to benefit from the compounding effect since their returns are reinvested into the fund to generate even more returns. The investors have the option to exit at the end of the lock-in period or reinvest their funds. These returns can prove to be very useful for meeting future expenses like marriage, children’s education, parents’ health, and purchasing a home.
- Tax Benefits- Tax planning is essential once a person starts earning. Investment in ULIP plans makes a policyholder eligible for several tax benefits. The premiums paid for ULIP plans are exempt from taxes under Section 80C, while the maturity amount is exempt under Section 10D. Another benefit is that returns on ULIPs are exempted from long-term capital gains tax.
- Professionally Managed– ULIP investments are managed by professional fund managers, thereby ensuring that the policyholder does not have to do any kind of research or have expertise in the working of the financial markets. The professionals take adequate care to invest the funds of policyholders in a variety of instruments to earn good returns.
- Suitable for All Types of Investors– ULIPs cater to the investment requirements of all types of investors. Different investment options are available for people with different risk appetites and investment goals.
- Switching Option– ULIP Plans also offer policyholders an option to switch their investment preferences from debt to equity or vice versa,based on their changing risk appetite and performance of the funds. And since a bachelor’s goals and priorities are likely to grow and change over time, the option to switch funds and redirect them into another category of financial instruments is quite useful. The switching option can be used to align investment with changing financial goals.
Investing in a ULIP scheme is a wise option since it allows a policyholder to build a corpus that can be used to pay off any loans that are due and fulfil long-term financial goals, besides providing a death benefit to the dependent members of the family. ULIPs also encourage systematic and disciplined investment besides offering tax benefits.