A unit-linked insurance policy (ULIP) combines the benefits of insurance and mutual funds, i.e., protection and savings. Therefore, the plan offers financial security against eventualities while also allowing you to accumulate wealth for your post-retirement years during which income flow reduces or stops.
What are ULIPs?
Wondering what a unit-linked insurance plan is? A ULIP offers dual benefits of insurance and returns from investment. Typical insurance policies only protect against uncertainties and eventualities. However, ULIPs offer life coverage and also allow investors to gain and accumulate wealth to meet long-term goals. Such a plan helps save tax since it allows a tax deduction on your premium payments. The maturity benefit is not taxed.
ULIPs vs Pension Plans
The main difference between them is the investment approach. A ULIP plan is an investment-cum-insurance product but a pension plan is solely meant for investment. So, you can choose between them based on your investment goal.
In a pension plan, only up to 40% is invested in equity funds. However, a ULIP comes with the flexibility to switch funds and lower the investor’s exposure to equities.
A pension plan doesn’t have a lock-in period. However, you need to stay invested in a ULIP for at least 5 years. The longer you stay invested, the higher can be the chance to boost your ULIP returns.
How ULIPs Can Help with Retirement Planning?
A unit-linked insurance policy can help you save for retirement by offering the following benefits:
Switchability
A ULIP policy lets you switch funds according to their performance. This helps you transfer your money around to get higher returns.
Cost-effective Top-up
If you have excess money to invest in a fund with better yields, you can do that by paying top-ups on premiums. You can readily add the additional funds to your existing plan by paying a modest fee. Top-ups are typically 1-3% of the existing premium. This is much less than the cost of a new plan.
A Range of Choices
Since risk appetite differs from one investor to another, ULIPs offer diverse investment possibilities. Here are 3 main kinds of funds to choose from:
- Equities: The prime focus is investing in stocks.
- Debt funds: The aim is to invest in debt securities, government securities and bonds.
- Balanced funds: Here, investment is made in both the above funds in a way to optimise returns and beat inflation.
Higher Rate of Returns
ULIPs offer higher average returns than other investment avenues like FDs, endowment plans, bonds and pension plans because the money gets invested in the stock market. You can use a ULIP calculator to get a rough estimate of the returns.
Who Should Get ULIPs?
A ULIP plan is ideal for those who have a long-term financial plan of insurance and wealth creation. This is not only suitable for retirement but also for other long-term goals like children’s education or marriage or buying a home.
Before buying a ULIP, make sure to calculate the estimate of the expected returns on a ULIP calculator.
Reference Links
https://www.insurancedekho.com/life-insurance/news/can-ulips-be-used-for-retirement-planning-3690
https://www.bajajfinservmarkets.in/mutual-funds/mutual-fund-pension-plans-vs-ulip.html
