When we look for financial advice, we get most of it from our parents, relatives, or friends. Their advice includes options that involve little to no risk. These include options like Bank FDs, PPF, NPS, post office savings schemes, etc. Except for a few that would advise you to go for mutual funds, all the advice you would get is to be safe. Since, every aspiring investor experiences this and maybe agrees with it, it is safe to say that Indians are generally conservative when it comes to investment.
At the same time, conservative tax saving instruments do not offer big enough returns to beat inflation. Moreover, traditional insurance products do not offer opportunities for wealth creation. You could invest in mutual funds for better returns, but they do not offer life coverage. The solution for this situation is a ULIP plan. It is a financial product that connects investment and insurance with the added benefit of tax saving.
While there is always more to learn about ULIPs, they are one of the best financial products to go for if you are thinking of long-term investment and insurance. Here are a few reasons why ULIPs are the perfect option for Indians:
You choose the risk
ULIPs allocate the premium you pay across different things. They invest that money into a combination of investment avenues like equities, debt instruments, and money market instruments. All of these instruments come with their own level of risk. You get to decide which option you want to invest in. If you are a young individual that has a more aggressive approach to investing, then you can go for equities. Whereas, if you like to take a more risk-aversive approach, you can go for a combination of equity and debt market options. Ultimately, the choice is for you to make.
You can switch when you want to
When you start with a ULIP, you select some investment options. If you don’t feel they are giving you the returns that you hoped, you can always switch to a different investment avenue. For example, if you are invested in debt market funds and want higher returns, you can always switch to equities.
Since the plan works on units, it offers a great deal of flexibility with investment options and switching them. For example, if a large share of your premium allocation is into debt instruments, you can simply take some of it out and just allocate it into equities. This means there is no limit to how many units you can transfer from one avenue to another.
Major tax benefits
One of the biggest reasons that many people put a lot of money into insurance products is because they offer a large number of tax benefits. ULIPs offer them too, but at a higher level. Moreover, you have ULIP tax benefits in the case of investing more money and taking money from it as well.
The premium you pay for a ULIP plan makes you eligible for a tax deduction under Section 80C of the Income Tax Act. However, you can only claim a deduction of up to ₹ 1.5 lakh in a financial year.
When it comes to tax benefits on withdrawal, you have to pay attention to the method of withdrawal. In a ULIP plan, there are three methods of withdrawal. The first is that of a death benefit. As per the insurance coverage of ULIP plans, your family gets the fund value of the policy. The money that they receive is exempt from tax. Another type of withdrawal is the maturity benefit you get on the completion of the investment plan. This type of withdrawal is also tax free. The final type of withdrawals are partial withdrawals which are also tax free after the ULIP lock-in period is complete.