- The risk associated with ULIPs lessen over the period of time
- ULIPs are considered better investment option for long term
- ULIPs inculcate a habit of regular savings
ULIP or United Linked Investment Plan provide dual benefit of an insurance plan and an investment plan. A part of the premium amount that one pays towards an ULIP is used to provide life cover to him whereas the remaining part is invested in a unit fund. An insurance company allots a unit to an ULIP investor and a Net Asset Value (NAV) on that unit is stated on a day-to-day basis. The investment value in the ULIP varies depending upon the performance of the unit fund.
Some of the prominent features that encourage an investor to put their money into ULIPs are:
- Tax benefits: Investments made in ULIPs qualify for tax rebate under Section 80C of the Income Tax Act.
- The investor can switch between the unit funds during the duration of an ULIP.
- Options to surrender the plan
- Possibility to attach additional riders to the main policy with an aim to provide added protection to the investor
Despite a good return rate and multiple features of an ULIP, an investor often faces confusion when it comes to deciding its duration for higher ROI. Moving forward, you get help to decide if ULIPs are an ideal investment option for short-term or long-term.
Higher initial cost
In the initial years, the cost associated with ULIPs are higher because of the policy charges. In the first couple of investment years, the amount invested is lower thus the returns on it. Though overall charges for the term of ULIP decrease over the years thus a greater part of one’s premium goes in the chosen unit fund.
Also, market fluctuations hinder good returns in the short term. In the long run, the unit linked investment plan yields better return rates but also have less risk associated to them. Therefore, it is suggested that one waits for 6-10 years after investing in the ULIPs.
The lock-in period of ULIPs is five years, which is considerably longer than the duration of other investment options such as mutual funds. It also instils a discipline of saving money. Though you buy ULIP once, but you save on tax every year until the policy term. Tax exemption is one of the biggest reasons why one should invest in ULIPs. The maturity amount received by the investor is also exempted under section 10(10D). This long-term asset doesn’t liquidate in panicky situations thus investing money in it for an extended period of time is a safer option too.
Flexibility in longer time yields better returns
ULIPs allow you to reap better returns with its option of switching funds during your policy term. Depending upon your willingness to take risk and financial goals, you may switch from one unit fund to another. You can make a choice between equity, balanced, income and growth funds on the basis of market situation. Investors also have the option to switch funds. Due to their flexibility feature, ULIPs help investors to earn better proceeds in a longer period because in a short span of time, you cannot assess the performance of a particular fund.
Safer option for new investors
The first-time investors usually do not have high willingness to take risks and thus try to stay away from instruments subjected to higher market risks. With the diversity of funds offered in ULIPs, first timers usually have more trust and assurance about this market-linked investment plan.
For safety of your ULIP Funds and long-term returns, investors need to be committed. First of all, an investor should carefully choose a fund and then follow the investment guidelines offered by an insurance company. Blindly following the advice of your financial advisor or agent and foreclosing a policy or stopping its premium before the end of the policy term would be a wrong decision until and unless if you have discussed it with the representative of the insurance company.