In the long-term horizon, financial planning invariably involves a risk-return trade-off. An offshoot of achieving this balance is financial security. While many investment options promise high returns, there are few that offer life cover along with returns. Unit Linked Insurance plan (ULIPs) stands out as one of them. ULIP offers dual advantage of insurance as well as long term capital gain by way of a lump sum on maturity. This can be simplified by using a ULIP calculator, whereby one can compute the premiums payable, given the desired maturity value, tenure and risk profile.
We shall study how one can effectively utilize ULIPs to meet diverse financial goals during various points of time and why it is crucial to find and start investing in the best ULIP plan in India now.
What is ULIP?
ULIP stands for Unit Linked Insurance Plan. It is primarily an insurance product with the simultaneous option to invest in equity and debt instruments. This entails payment of regular premiums throughout the tenure of the plan in return for a sum assured on maturity. Since one has to pay premiums over an extended period of time, it is best to start investing in ULIP plans early to ensure a lower value of premium payment and significant wealth creation on maturity. The annuity associated with ULIPs help in wealth creation with high capital returns over a period of time.
One must evaluate the sufficiency of insurance coverage under the ULIP plan. This can be achieved by studying the claim settlement ratio, which looks into its effectiveness in disbursing money in case of a claim. The ULIP plan based on death benefits falls under the following two categories:
ULIP based on death benefit: This plan is suited to one’s family. In the absence of the insured, the nominee receives the higher of the sum assured or the accumulated fund value. The mortality charge declines with each subsequent year as the corpus grows. This way risk is mitigated with time.
ULIP based on death benefit: Under this plan, in the event of an untoward incident, the nominee receives both the sum assured as well as the accumulated fund value. This has its drawback of a higher premium payment to cover for the mortality risk of the insured by way of the higher lump sum amount disbursed by the insurer. The policy also covers age-related health risks, which multiplies with time.
Let’s consider an example. Assume an insured has an accumulated fund value of Rs 10 lakhs after a duration of 5 years and the sum assured stands at 30 lakhs. In the first scenario, the nominee would receive Rs 30 lakhs, but in the second scenario, the nominee would receive Rs 40 lakhs. This is a huge differentiating factor as the financial security cover is significant in ULIPs.
As one can infer from the above, ULIPs is the single answer to diverse problems of an investor. It provides an ideal balance between market-linked returns, along with the safety of insurance and tax benefits. Additionally, with regular, manageable premium payments, a small investor can accumulate a lump sum in the future to meet any sudden financial needs or emergencies. In ULIP investments, time is of the essence. The longer one stays invested, the higher are the chances of building a sizeable corpus, which could benefit the nominees in case of one’s untimely death. After all, life should not come to a standstill for the rest of the family in case of sudden death.