ULIPs are a great alternative to traditional life insurance for individuals looking to diversify their insurance premium payments. Life insurance is vital for any person who has financial dependents. Though one may be working hard to ensure a secure present for their loved ones, there is no saying when an unfortunate event will strike. With a life insurance policy, you can do your bit in securing your family’s future financially. And, if you are looking for wealth creation alongside a life cover, then you should plan to buy a ULIP plan online or offline.
Like most insurance policies, ULIPs, too, have to be renewed after a particular duration. As compared to exiting the policy or allowing it to lapse, ULIP renewal is a good idea. Here’s why.
How does a ULIP work?
A ULIP plan works by dividing your premium payment into two ways. One portion goes towards building the life cover. The other is invested by the insurance company into equities or debt funds, as per your choice. The invested fund gains return on the basis of market performance (for equity funds) and interest rate fluctuations (for debt funds). When the ULIP plan has completed five years, which is the mandatory lock-in period for ULIPs, the policyholder can enjoy the returns accumulated until then.
Many policyholders often consider exiting the plan once they are eligible to receive the returns. However, as experts suggest, this may not be the wisest decision.
Why you should renew your ULIP diligently
- Continuous tax benefits
One of the main reasons why you should invest in ULIP plans is the multitude of tax benefits it offers. The premiums are eligible for tax deductions up to Rs 1.5 lakhs as per Section 80C; the death benefit pay-out and maturity benefit pay-outs are tax-exempted. However, if you have bought the policy after Feb 1st, 2021, and the annual aggregate premium of your ULIP is Rs 2.5 lakhs, then the maturity proceeds can be taxed with capital gains tax.
The longer you hold on to your ULIP, the more will be tax benefits you get to enjoy.
- Wonders of compounding
Any investment that contains compound interest is better allowed to exist for as long as possible. Compounding works by regularly reinvesting not just your principal amount but also the interest that you may have gained on the principal amount previously. This new reinvested amount then gains higher returns and is then invested once again with the recently acquired interest, and so on. Not opting for ULIP renewal means that you are not allowing your money to experience the wonder of compounding.
- Consistent life coverage
A ULIP not only provides returns on your market- or debt-linked investment but also offers life coverage to the policyholder. This life coverage is important for your family’s future and also for your present. It makes you more secure, permitting you peace of mind unlike any other. You have more freedom to pursue your other goals with a freer mind, as the ULIP will take care of present as well as future objectives.
- Wealth assurance for your future goals
ULIPs are ideally kept for a longer duration, not only due to the compounding benefits, but also because their structure is such that they are ideal for long-term goals. For example, you can buy a ULIP plan, keeping in mind the plans for your children’s higher education. Or, if you have plans of retiring at a particular age, you can retain the ULIP until then. You can then set up a regular withdrawal plan that provides you with all the returns accumulated over the years in instalments.
Before you exit or let your ULIP lapse, remember this….
If the market performance has been steadily low, and you are concerned that your money is bound to suffer as a result, then you can always switch to debt funds. The fund-switching feature offered by ULIPs is a major reason why you should invest in ULIPs. If the interest rates are falling, resulting in a lower price for your debt funds, then you can make the switch to equity funds.
Whether you buy a ULIP plan online or via the traditional route, ensure to read the terms and conditions of the policy before signing. Also, remember that tax benefits are subject to modifications in tax laws.