Wealth Guide: What you should know about investing in ULIPs in 2022 - Returns, Income Tax Benefits, Lock-In Period

Over the last two years, the Coronavirus pandemic has made a lot of us realize the importance of financial planning. There’s a growing demand for products that ensure valuable returns on investments along with providing a safety net for one’s dependents even in their absence. Perhaps that is the reason why insurance penetration in India has increased. For many, the search for right investment option has ended at Unit Linked Insurance Plans or ULIPs. Vivek Jain, Head-Investments, Policybazaar.com, says, "The plan is becoming a preferred option for providing life cover along with an investment component. Here is what you should know about ULIPs investment in 2022."

Explaining the dual benefits of ULIPs, Vivek Jain says, "The perfect formula to achieve financial security for yourself and your family is to ensure that there are enough financial resources to take care of life goals in your lifetime and beyond. While one can invest in different instruments to meet their insurance and investment needs, ULIP can be an effective tool that serves both purposes. By investing in ULIPs, you get a life cover and the choice of allocating your money in equity and debt as per your preference. So not only it ensures a payout for the family in case of the demise of the policyholder, it also builds a corpus over time to take care of their financial needs even if the policyholder survives the policy term. This is opposed to a simple term insurance plan where the insured does not receive any payout if he or she survives the policy."

Talking about Market-Linked Returns of ULIPs, Jain adds, "ULIPs invest in the stock market, or debt market, or both, depending on the preference of the policyholder. Thus, they have the potential to offer higher returns compared to other investment instruments. Moreover, they also offer you the flexibility to switch between equity and debt funds. You can use this feature to make most of your investment by opting for the right fund as per the prevailing market situation and your risk profile. If you are willing to take more risk, you can invest in equity. If you prefer a more conservative approach, you may invest in debt funds. Someone with moderate risk appetite can invest in balanced funds as well that have a mix of equity and debt investment. Best of all, ULIPs work on the principle of diversification ensuring that all your eggs are not in the same basket, irrespective of whether you choose equity, debt or both. Depending on the kind of investments you make, you can get up to 12-15% returns on your money. However, before you finalize a plan, it is a good idea to figure out how flexible the scheme is in terms of the number of switches allowed during the term of the policy."

Explaining tax benefits of ULIPs, he said. "ULIPs come with substantial tax benefits on multiple levels. First and foremost, it provides tax rebate on the annual premium from your taxable salary, up to a limit of Rs 1.5 lakh, under section 80C of the Income Tax Act, 1961. Moreover, the amount that you receive on maturity is also exempt from capital gains tax as long as the annual premium of your policy does not exceed Rs 2.5 lakh. So essentially, ULIP plans remain the only way to invest in equity markets without the burden of paying LTCG tax. Also, in case of the death of the policyholder, the payout received by the family is also tax free. So not only you get life insurance and investment benefits when you opt for a ULIP, you also save on your tax liability."

Decoding lock-in period details, he added, "ULIP plans come with a minimum lock-in period of five years. This means that the policyholder cannot withdraw the invested money before the end of this lock-in period. Withdrawing money during lock-in period can result in discontinuance of life insurance cover. The invested amount gains a 4% interest during the lock-in period. After the lock-in period is over, the policyholder can partially or fully withdraw their money without having to pay any surrender charges; rather they will be eligible to receive their fund value. However, one should invest in ULIP with a long-term view and should at least lock their money for 15-20 years to enjoy good returns. The past trends show that ULIPs have outperformed their benchmark index after 7-10 years and not in short term. So, a longer lock-in period helps the investor with wealth creation."

"ULIPs offer multi-dimensional benefits and hence can be worthy ingredients in your financial planning recipe. Carefully and smartly used, they can ensure you can live your life with peace of mind that your family’s life goals are taken care of whether you are there to see them fulfill them or not," he concluded.

(Disclaimer: The views/suggestions/advice expressed here in this article are solely by investment experts. Zee Business suggests its readers to consult with their investment advisers before making any financial decision.)