How do ULIPs provide insurance coverage and enable wealth creation
How do ULIPs provide insurance coverage and enable wealth creation

If you want to create wealth while also securing your family’s future, you may want to opt for a Unit Linked Insurance Plan (ULIP). ULIP is a financial instrument that provides the benefits of both investments and insurance. Depending on your financial goals, you can choose from some of the best ULIP plans offered by life insurance providers.

How ULIPs work

ULIPs cover you in exchange for premiums. You can pay premiums on a monthly, half-yearly or yearly basis, depending on the terms of your chosen plan. The insurer allocates a portion of your premium to provide life insurance while the remainder is invested in securities.

How ULIPs provide insurance coverage

The life insurance portion of ULIPs covers you up to the sum assured. Upon your demise, your nominees receive the sum assured amount as a death benefit.

You can choose the level of life insurance, premium payment option and policy duration per your requirements. The sum assured can range anywhere from 10 times the annual premium amount to 25 times the annual premium amount, depending on your choice of insurer and plan.

Nominees can receive two types of death benefits. Type 1 ULIP pays the nominees the sum assured value or the fund value, whichever is higher. Type 2 ULIP pays the nominees the assured sum value as well as the fund value.

Your insurer may also allow top-ups to increase your sum assured value.

How ULIPs enable wealth creation

Whether you want to save for retirement, finance your child’s education or simply grow your wealth, ULIPs may prove beneficial. The portion of your premium that goes to investments gets invested in the following:

  • Equity funds: In equity funds, money gets invested in the stock market. While there is a potential for greater returns, the risk associated is also high.
  • Debt funds: These invest in fixed-income instruments like corporate or government bonds, etc. Debt funds tend to be low risk with potentially lower returns when compared to equity funds.
  • Balanced funds: In balanced funds, the premium is balanced between debt and equity instruments to provide you with balanced returns and risks.

ULIPs come with a 5-year lock-in period, thereby enabling financial discipline to meet your long-term goals.

Typically, insurers provide various fund options, and you can choose the one you prefer. However, if you find the fund’s performance unsatisfactory, you may switch to another fund. You can consider your risk appetite and investment horizon to select an investment strategy suitable for your goals.

Further, you can partially withdraw your funds once the lock-in period has lapsed.

Tax benefits of ULIPs

ULIPs offer tax benefits that aid capital appreciation. The investments you make towards life insurance are eligible for benefits under Section 80C of the Income Tax Act, 1961. Additionally, the sum assured that your beneficiaries receive after your death is exempt from tax, per Section 10 (10D) of the I-T Act. However, the premium payable in a year should not exceed ₹2.5 lakh.

Bottom Line

The unique benefit of investment and life coverage that ULIP offers make it an ideal choice if you’re looking to save for the long term while also ensuring financial protection for your loved ones when you’re no longer around. You can invest in ULIPs per your terms, i.e., policy period, premium payment term, choice of payment frequency as well as choice of investment strategy. Plus, you can always get an estimate of your ULIP investments using a ULIP calculator available online.

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