More and more people are choosing ULIPs as an investment. There are many reasons why they are popular. They are one comprehensive package that includes both insurance and investment. If you want to make your first investment, a ULIP could be the best choice as it offers tax benefits and a good amount of flexibility for minimizing risks. You should think about the pros and cons of ULIPs before deciding to invest, though. In this article, you will get to know the comparison that is required for a beginner to make a decision.
What does ULIP mean?
A Unit-Linked Insurance Plan is a type of insurance plan that provides dual benefits: insurance and investment. You can choose which funds to invest a part of your premium in, and the rest goes towards life insurance. You can move your money around to get better returns or more safety. You can choose to invest in equities, debt, or balanced funds based on how much risk you’re willing to take.
Let’s talk about the disadvantages of ULIPs
ULIPs, like all other investment products, come with a set of disadvantages. If this is your first investment, it’s crucial to know some of the facts about ULIP insurance that you might notice.
Difficulty: A ULIP is both a life insurance policy and an investment, which can be hard for inexperienced investors to grasp. People have become accustomed to a single instrument having one use, like saving/, investment or insurance. You can also be terrified by the number of costs involved. You need to keep track of your fund NAVs and make decisions about switching, redirecting, and investing your money in suitable places to get the most out of your ULIP insurance plan. Because of all this, ULIPs are a complicated financial choice that needs a good understanding of the insurance market.
Costs: ULIPs usually come with a lot of fees. In the beginning, these fees are higher since they cover things like managing your money and running your coverage. As time goes on, your possible returns also go up. But it takes time because a big part of your premium goes to fees at first.
Market Realities: One downside of the ULIP insurance plan is that you make less money from it in the first few years since the market has become so unpredictable, and you’re still figuring out how to deal with it. You might take chances when you need to, or you might not. You might choose to stay safe and miss out on possible benefits.
Lock-in Period: You can’t take your money out of ULIPs for five years after you put it in even if you give it up within five years.
Switching Fees: Most insurance companies will let you swap the funds for free up to a specific amount. But after this point, switching costs money, so you need to think about how much money you could make compared to how much it will cost you.
Death Benefit Lower when you compare it to term insurance: One major problem with ULIPs compared to term insurance is that the death payout is lower. Term insurance gives you higher coverage for a lower premium, but ULIPs don’t give you as much coverage because part of the payment is invested. A term plan can be a better choice if you want to be sure your family’s financial future is safe.
Active management requirement: ULIPs are not for people who don’t want to invest. Policyholders need to keep an eye on market movements and change their investments as needed because they have a lot of fund options and can switch between them. If you don’t want to be involved in your investments, mutual funds with professional fund management can be a better choice.
Benefits of ULIP
You know how complicated it might be to invest in a ULIP insurance plan. There are numerous additional features that make it a great financial choice. Like any coin, ULIP has two sides: the pros and cons of ULIP. Keep reading to learn about the benefits of putting money into ULIPs.
Comprehensive investment and insurance solution: All investment products are complicated, but if you understand them, ULIPs can be your closest companions. Combining financial and investment products makes financial planning easier because investors don’t have to keep track of multiple instruments independently, which saves them time and effort.
Managing Funds Like a Pro: ULIPs give investors the benefit of having professional fund managers in charge of their investment portfolios. These fund managers look at market trends, choose the best places to invest, and make smart choices to get the most money back. They also help investors along the way by giving them advice and support.
Lower Costs: The IRDAI’s regulatory action has made ULIPs far less expensive. ULIPs have become a better investment choice since they are cheaper, which increases the overall return potential for investors.
Options for Switching That Are Flexible: Some schemes let investors swap between funds without paying extra fees. This feature lets investors change their investment plan based on how the market is doing or their changing financial goals. This makes sure that their portfolio is always in the best place and that they get the most money back over time.
Long-Term Growth Possibility: ULIPs have a lock-in period, which is usually between 5 and 10 years. This can be good for investors who want to hold their investments for a long time. Investors can take advantage of the power of compounding and give their investments enough time to grow by committing to them for the long term.
Partial Withdrawal Option: Emergencies can happen at any time. ULIPs let investors take some of their money out after a lock-in period, which is usually five years. This keeps the underlying investment safe while also making sure there is enough cash flow.
Tax Advantages: Section 80C of the Income Tax Act states that ULIPs can help you save money on taxes by letting you deduct up to ₹1.5 lakh from your premium payments. Also, the maturity proceeds are tax-free under Section 10(10D), as long as certain conditions are met. For investors who want to get the most out of their money while paying the least amount of taxes, ULIPs are a good choice because of this tax-efficient structure.