How ULIPs Work And What Should You Know Before Investing?
Humans are indecisive at times. We want to take risks, but also want to save our skins if we can. The same can be said about our financial decisions. We want to make more money, but also save some for a rainy day. Wouldn’t it be nice if there were a plan which could act as insurance as well as an investment? Well, there is. A ULIP! Unit Linked Insurance Policies or ULIPs as they are commonly known are one of those plans that offer multiple benefits in a single investment.
How does a ULIP work, you ask? Just like any other insurance plan, when a person invests in a ULIP, he or she has to pay a certain premium for the coverage amount chosen on the term insurance calculator. What the insurance company does is, it uses a part of the premium to provide insurance coverage, whereas, the rest of the premium is invested in equity or debt instrument. The policyholder has the flexibility to choose equity and debt for their investment plans. If you are considering investing in a ULIP, here are a few things you should know before investing.
It acts as a term insurance plan
One of the major advantages of a ULIP is the life insurance cover it offers the policyholder. By investing your money in a ULIP, you get to protect your family from the uncertainty of life like a term insurance plan. And it also makes sure that they are taken care of in case of your untimely demise.
As mentioned earlier, a part of your premium is invested in either equity or debt instruments. This gives the policyholder an opportunity to generate wealth through investments. ULIPs are an excellent choice for investors who have a long-term goal in mind. The compulsory lock-in period of a ULIP is 5 years, but with time, it does generate significant returns for the investor.
As per the Income Tax Act, 1961, the premiums that are paid by an investor towards ULIPs are eligible for a tax deduction under Section 80C.
Due to all these benefits, ULIP has been a preferred choice of investment for many. Not only is it easy to understand and generate steady returns in the long run, but it also teaches prospective investors to save and beware of their spending habits.