First-time or new investors generally have a low-riskappetite, and so, prefer to invest in safe instruments with stable returns.
So, are ULIP investments safe for them?
The answer to this is, yes, ULIPs, with their unique features and attractive benefits, are safe for all types of investors. These policies not only come with a double benefit of life insurance coverage plus investment, but also allow investors to choose the type of fund in which they wish to invest. Read on to know more about ULIP benefits and their suitability for new investors.
Who Should Invest in a ULIP?
ULIPs are best suited for investors who are looking to create wealth over the longterm while enjoying the benefits of an insurance cover. The wealth creation could be for funding long-term goals like retirement, children’s education, or the purchase of a home. And when an investor continues with a ULIP until maturity, wealth creation becomes possible.
Benefits of Investing in ULIP Schemes
- Insurance Coverage- ULIPs not only provide life insurance cover but also come with an option to buy additional riders for accident and critical illness coverage. Many insurance companies also offer a disability cover, wherein if the policyholder becomes disabled due to an accident or illness, his premium payments are discontinued, but the policy remains in force.
- Wealth Creation Through Investment– ULIPs not only provide insurance coverage but also help a policyholder in creating wealth while saving taxes. Wealth creation becomes possible since a portion of the premium paid by the policyholder is used to invest in different types of instruments like equity, debt, money market instruments, or a combination of all. Different types of ULIPs cater to the investment needs and risk appetites of different investors. This makes them highly suitable for all categories of investors who can choose to allocate their funds in the desired manner for investment in different instruments.
- Auto Mode of Investment– Now, first-time investors may be hesitant to invest because of their inexperience or inadequate knowledge about the working of the markets. This problem can be resolved by choosing the auto mode of investment, wherein the fund managers take the responsibility of investing the funds in different proportions while keeping their goals in mind. This option allows investors to participate and benefit from investment, without having to study and analyse different instruments and their working.
- Switching Funds and Strategies-Investors with low-risk appetites can also aim to create wealth and build a corpus by using the switching option offered by the insurance companies. This means that an investor can change his asset allocation for investment to match his changing goals, risk-taking ability, and the performance of a particular instrument or fund. So, a new investorcan start with investing more into equities and then shifting the funds to debt and balanced funds in the later years of the policy. The switching can also be done in response to the market trends to keep a balance between the returns and risks associated with them. An investor who is averse to risk can invest all his funds in debt funds and reap stable returns.
- Lock-in Period– Young and new investors tend to get impatient early and may decide to surrender a policy before maturity. But the five-year lock-in period of ULIP plans ensures that the policyholders stay invested and continue to pay premiums on time. This ensures discipline among investors, besides helping them benefit from the compounding effect associated with long-term investments.
- Tax Benefits– Another reason to choose ULIPs over mutual funds or other investment options is the tax benefits associated with them. The premiums paid towards ULIPs are exempted from tax every year, subject to certain limits as per Section 80C of the Income Tax Act. Similarly, the maturity amount is exempt from tax under Section 10D. However, for policies taken on or after 1.02.2021, the income or return on maturity is treated as capital gain if the annual premium is more than Rs 2.5 lakh.
These multiple benefits make ULIPs suitable for all types of investors, especially the ones looking to create wealth for funding various types of goals. Although these plans do not offer any guaranteed returns, they offer investors a variety of options to invest in different instruments with varying risk profiles.
