Money plays its role as measurement of rich and poor. It is a tool that sets your transaction. Without money, you cannot do much. With the increasing relevance of money, people started talking of savings.
Well much later, when just saving money did not help, individuals thought of making investments. When making profit over money got legalized, investment instruments picked up well. Financial tools like ULIP and SIPs were introduced. But why? What was the need of these new tools when the market had buckets full of products that allowed savings.
Think of it like this, when every month you keep aside Rs.10,000 in your locker, you happen to save Rs.1,20,000 at the end of the year. Now think that you give Rs.10,000/- to a friend in need and ask him to return the amount with interest of Rs.1000 every month. At the end of the year, you will have 1,32,000/-. Isn’t your profit higher than the normal savings process?
It explains why we have ULIPs despite savings plans giving good returns.
Let us now explore more about ULIPs.
What is a ULIP?
A unit-linked insurance plan is a dual benefit insurance policy. The insurance pays for both the life cover as well as investment. A ULIP helps you to attain long term goals better as the returns under the policy are higher.
Next let us read how you can invest in ULIP?
How to invest in ULIP?
The premium that you pay under a ULIP, is divided into two parts. One part goes to the life protection cover while the other goes for the investment. The part of the premium that is invested goes into any of the funds that include equity, debt, or combined. The investment in any of these will be based on your risk absorption capacity.
Suppose you are not a risk lover and are happy with stable returns, you better invest the money in debt funds. Yes, you can do that. ULIPs give you the freedom of investments. You can be aware of your money and also choose to switch between the different funds.
Before investing in ULIP, it is wise to monitor the performance of funds.
But why are ULIPs considered better than savings? For that, let us explore the savings plan details.
What is a savings plan?
A savings plan is a traditional life insurance policy that gives you dual benefits of savings as well as insurance. The insurance type is popularly called the Endowment Plan.
Further, a savings plan is categorized in two types one is participating and other is non-participating. The participating life insurance gives you a bonus along with the maturity benefit. The bonus is declared by the insurance company after it earns profit in a year. Unlike this, a non-participating life insurance policy does not have the component of bonus. It comes with only guaranteed returns without bonus.
Features of Savings Plan
These are the features of a savings plan:
- Financial protection: A savings plan provides financial protection. It comes with the life cover and savings opportunity. The plan provides financial security to the dependents in the family after the unfortunate demise of the policyholder.
- Maturity Benefit: The savings plan offers a guaranteed maturity benefit. The benefit amount is based on the type of the savings plan.
- Flexible Premium Payment: The plan comes with the convenience to choose the premium payment. You can choose between regular payment, limited payment or single premium payment.
- Joint-life protection: A savings plan provides the option of joint-life protection.
Even though the policy can give you multiple benefits, it does not give you a chance to invest and get high returns. This is why ULIP is better.
Let us read more.
Why is ULIP better than the savings plan?
A ULIP is better than the saving policy because of these factors:
- ULIPs yields high returns:
A ULIP gives you high returns when you invest money in the equity funds. Though you have a choice to make from the stable or high returns, the savings plan does not give much opportunity like this. The latter comes with a guaranteed benefit which is further loaded with bonus only. With ULIPs, if you start early, the power of compounding and further enhance the yield under the policy.
- ULIPs offers wide choice of investment:
You can pick the funds based on your risk tolerance. As an example, you can invest in debt funds if you are a low-risk taker. If you’re a moderate risk taker, balanced funds are a good option. And, you can invest in equity funds if you are a high-risk taker.
- ULIPs comes with the freedom to switch between the fund:
ULIPS also gives you the freedom to transition from one fund to another, from equities to debt and vice versa, depending on market conditions or your investment objectives. As a result, this option allows you to adjust the ratio of your invested money without incurring any additional costs. There is no such option under the savings plan. The policyholder is informed about the amount of money he will earn as the maturity benefit under the policy.
- Long-term investment benefit with ULIP:
If you want to build long-term wealth, ULIPs are the way to go. The returns on ULIPs are connected to the stock market. If you invest for the long term, you can absorb market volatility and hazards while earning significantly higher profits. As a result, if you have long-term future goals, such as saving for a down payment on a house or paying for your child’s school, ULIP is a good method to fund them.
- ULIPs come with option of top-up:
ULIP is a life insurance policy that allows you to top-up the investment over and above you have already made. As ULIP are linked to market performance, when you see good returns flowing in, investing more as top ups can help. The option is not available under the savings plan.
A life insurance policy, whether a ULIP plan or savings plan is bought with the intent to prepare financially for long term goals in life.
There are a few things that come in common with the insurance policies. One is the tax benefit and the other is the option to include riders. The premium paid in a year under the life insurance policy is admissible for tax deduction under Section 80C. The total amount allowed for deduction is Rs.1.50 lakhs. The maturity amount received under the policy is also tax exempt under Section 10(10D).
The riders are the optional covers available at a nominal premium.
ULIPs are an excellent investment option for long-term financial goals because of their numerous perks. So, if you want to profit from market-linked growth as well as life risk protection, ULIP is a great alternative to consider. For more information on ULIPs, please visit the link here.