Building a future for oneself and one's family is a task that may be highly dependent on prudent financial planning. For instance, if you have a specific goal to accomplish in the future, such as purchasing a home, you may wish to begin saving immediately in order to reach that objective. Your savings may or may not be sufficient to help you achieve your goals. Investing your money, on the other hand, can help you keep up with the times and face inflation without compromising your objectives significantly. A Unit-Linked Insurance Plan (ULIP) could be on of the best investment plans for you to generate funds to begin your investment journey today.
When it comes to ULIPs, your premium is invested in a variety of market-linked funds that provide returns that are tied to the market. ULIPs could be considered long-term plans, which means that they may offer significant returns over the long term, making them more suitable for individuals who desire fund generation through market-linked instruments for long-term objectives.
Before we delve into how you may use ULIPs for fund generation and why you may find them appropriate, let's examine the structure and operation of ULIPs.
How do ULIPs work?
ULIPs, also known as unit-linked insurance plans, are essentially life insurance products. However, these plans also offer the opportunity to generate funds through the investment component. It may be referred to as a dual-benefit plan, as the policyholder can both protect their family against the possibility of misfortune and create wealth for their collective and individual financial futures.
So, how do ULIPs work? You can begin by using an online ULIP calculator to estimate the potential returns of these plans. This may also aid you in the process of selecting and narrowing down the plans.
Once you have determined which ULIP you wish to purchase, you can finalise the plan's purchase online or offline. To maintain the policy's validity, you must pay the premiums on a regular basis at specified intervals.
As long as the policy is in effect, you are provided with life insurance. This may enable you to provide financial security for your family so that they can confront unforeseen circumstances after your passing. The second aspect of the plan is the generation of funds, which may allow you to realise your long-term goals.
You should select the appropriate ULIP funds based on your objectives. There are a variety of available funds that may offer varying levels of risk and return. Your options may vary based on your risk tolerance.
Why may ULIPs be one of the best options for fund generation?
There may be a variety of programs from which to choose and construct an investment portfolio. Why should ULIPs be one of them, particularly if you want to generate funds? Let's examine some of the primary factors why ULIPs may be effective for fund generation.
- Ease of Administration
When you purchase a ULIP, fund administrators can manage the plan's investments on your behalf. The fund manager will manage your portfolio in accordance with the instructions you provide regarding your risk tolerance, investment horizon, financial objectives, etc. This may give you peace of mind regarding which investments to make, when to purchase or sell assets, when to switch between funds, etc.
- Let's You Create a Balance
Regarding ULIPs, you have a selection of funds. Your ULIP fund generation strategy may hinge on your risk tolerance and your objectives. You may wish to select the appropriate fund options. Depending on your life goals, ULIPs may enable you to choose the funds that you deem to be most suitable for you. Depending on your objectives, you can tilt your portfolio towards debt or equity or construct a balance between the two.
- Suited for Long-Term Objectives
If you choose ULIPs for fund generation, keep in mind that there is a five-year lock-in period. In addition, because they operate through the power of compounding, they may yield significant results over the long term rather than immediately. Therefore, you may find it prudent to maintain a long-term investment in these plans. This may enable you to develop investment discipline, thereby increasing your likelihood of maintaining your investments.
- Tax Benefits
Even when used to generate funds, ULIPs, like other life insurance plans, provide tax advantages. According to the provisions of Section 80C of the Income Tax Act of 1961, the premium you pay is eligible for a tax deduction. In accordance with the amendments to Section 10(10D) of the Income Tax Act of 1961, the maturity benefit derived from ULIPs purchased after February 1, 2021, with annual premiums of less than Rs.2.5 lacs, is exempt from taxation. However, for ULIPs with an annual premium exceeding Rs. 2.5 lacs purchased after February 1, 2021, gains may be taxed as capital gains, depending on the type of funds invested. For all ULIPs purchased prior to February 1, 2021, regardless of the premium amounts, all returns are tax-free. Under the Act, the mortality benefits you receive are also exempt from taxation. Remember that these advantages are only available under the previous tax system.
Types of ULIP Funds
There are several kinds of ULIP funds from which you may choose. It should be noted, however, that past performance is not necessarily indicative of future performance. These are listed below:
- Equity Funds
Equities are high-risk, high-reward investments. Based on the type of stock they invest in, these funds are categorised as large-cap, mid-cap, and small-cap funds. Equity funds are appropriate for investors with a high-risk tolerance because they seek capital appreciation through market-linked returns.
- Debt Funds
Under these funds, your premium is invested in debt-based securities, such as government securities, corporate bonds, etc., on the debt market. Due to the fact that these are fixed-income instruments, debt funds bear a lower risk.
- Liquid Funds
If you have a low-risk tolerance and don't mind relatively sluggish growth, you may want to invest in liquid or cash funds. Here, investments are made in money-market instruments, which are short-term, high-credit-rating debt securities. These are readily redeemable, making them a suitable option for short-term objectives.
- Balanced/Hybrid Funds
These funds invest in both equity instruments and debt securities through a diversified asset allocation. This provides you with capital appreciation from equity investments and steady income from debt instruments. Due to the funds' diversified holdings of equity and debt instruments, the level of risk is moderate.
Conclusion
The generation of funds can be a crucial component of your overall financial planning, as your future objectives may depend on it. With ULIPs, you may be able to take advantage of a structured plan that allows you to establish market-linked wealth while also securing your family's financial future.
