ULIP – The Tricky Investment Option and How to Make Good Money from It

A life insurance plan is an important component of living a financially secure and worry-free life. Such a plan can relieve the tension that might plague you about the financial requirements of your loved ones in case anything unfortunate happens to you. However, did you know that there is a type of insurance plan that not only offers life cover, but along with it, a chance to invest in different instruments and gain plausible returns as well? Such plans are called ULIPs, or Unit Linked Insurance Plans.

Since it is intermingled with life cover, some may think of a ULIP policy as a complicated or tricky investment option. The truth, though, is that with the right planning and understanding of the funds, you may be able to gain maximum returns on your investment. Let’s take a detailed look.

How do ULIPs work?

As with other insurance products, you are expected to pay a certain amount as a premium for your ULIP policy. A portion of the premium is directed towards your life cover corpus and another portion towards the investment selections you have made. There are various types of ULIP policies in the market to suit every risk profile: equity funds for the risk-taker, debt funds for the risk-averse, and a combination of both for those looking for a balanced perspective.

Regardless of the option you may have chosen or the amount you may have directed towards investment, if you have opted for a ULIP policy, you would be expecting good returns on your investment. While the returns are subject to a variety of market conditions, some actions on your part can help you maximise the returns.

How to make good money from your ULIP policy?

Understand your risk appetite 

Are you someone who is okay with low returns due to the minimal risks attached to them? If the answer is ‘yes’, opt for debt funds. But if you are fine with high market volatility and the consequent risks attached with it, then equity funds may be the right option for you. A balance can also be achieved by opting for a combination of both. A strong understanding of your risk appetite is therefore important before you begin your ULIP journey. A ULIP plan calculator can help you understand the difference each fund option can have on your returns.

Consider switching funds 

So, you have been watching the market and you have a firm belief that the markets will be experiencing a high soon. This may be a good chance to consider fund switching in your ULIP. Essentially, fund switching is when the investor diverts their investment from one asset class to another.

Let’s assume you have around 75% of your investments in risk-free instruments and the remaining 25% in equity funds. By fund switching, you can divert a larger portion of the investment into equity funds if you are of the opinion that the market will be performing well and you are willing to take the risk. There are many types of ULIP policies that allow you to opt for fund switching.

Plan and choose efficiently

When it comes to making financial decisions, no other factor takes more precedence than planning. List down your financial goals and the time period you want to achieve them by, consider your budget for the investment, and so on. Remember to choose an insurer that has extensive experience when it comes to handling ULIPs and provides you excellent service as well. If you are unsure as to where you should start, a ULIP plan calculator can be of immense help to you.

Remember to file for tax deductions against the ULIP premium

One major way in which ULIP triumphs over other investment options is that the money paid towards the premium of your ULIP policy is eligible for tax deductions. As per Section 80C of the Income Tax Act, a ULIP policyholder can claim tax deductions against the premium for their ULIP policy. The maximum deductions one can gain is Rs. 1.5 lakhs, given that the conditions prescribed in the Act are met. Plus, the maturity amount of your ULIP plan is tax free as well.

However, if you have a high value ULIP policy whose aggregate annual premium exceeds Rs. 2.5 lakhs, then the maturity amount can be taxed as per the new tax regime. It is highly advisable that you consult a financial expert or tax advisor to get a full picture of the same.

In conclusion, we can say that though a ULIP plan may seem like a tricky investment option due to the various factors it is intermingled with, the right mindset and knowledge can help you gain good returns.

Post Author: Khloe Diego