The COVID-19 pandemic is a sobering reminder of the importance of financial planning. With so many unfortunate losses to life and savings globally, it becomes more important than ever to think about insurance and long-term wealth creation. Let’s take a look at whether ULIP plans are a good investment in these trying times.
A Quick Overview of ULIP Plans
Unit-linked insurance plans are a dual objective instrument. They provide life cover (and health cover, as may be the case) along with long-term investment in various asset classes of your choice. You can monitor the performance of the returns regularly, among various other benefits.
There are a few different types of ULIPs, based on various criteria.
Types of ULIPs
- Based on the Fund Choices for Investment
- Debt ULIP
These ULIP plans invest the money in debt instruments. These include government securities, bonds, corporate bonds, and debentures. These asset classes are relatively stable. Hence, the ULIP plan returns are lower, but you minimise the risk too.
- Equity ULIP
In this type of ULIP, the money goes into shares of companies or index funds. They are subject to market fluctuations. Therefore, they are riskier, but also hold greater potential for higher returns.
- Hybrid ULIP
If you are a moderate investor, hybrid ULIP plans might be right for you. The risk of equity is moderated and hedged by the allocation to debt assets. The returns are likely to be better than pure debt ULIPs, but not as good as equity ULIPs.
- Cash funds
Some ULIPs allocate the money to low-risk instruments like cash deposits, term deposits, market funds, etc. that are cash instruments. Therefore, the risk is very low.
- Based on Returns
- Guaranteed ULIPs
These ULIP plans limit your market exposure so that you can get some returns. They do so by investing a smaller portion of the money in equity assets to preserve capital.
- Non-Guaranteed ULIPs
These are riskier financial tools. These might be for you if you are a risk-taking investor who wants high returns. The capital preservation is not assured, since more of the premium money is allocated to equity assets.
What About COVID-19 Investing?
Considering the nature of ULIPs, many features make them a reasonably good investment even during COVID-19. These benefits are:
- Insuring Your Life
The pandemic has shown us the importance of getting a life cover. The death benefit received by the nominee is about 105% of the premium paid. This will prove to be extremely crucial, due to the public health threat that COVID-19 is.
The Insurance Regulatory and Development Authority has made it mandatory for life insurance policies to offer COVID-19 cover.
- Tax Benefits
In these difficult times, we have to use all possible avenues to reduce our tax liabilities. ULIPs premiums are subject to deductions under Sec 80C of the IT Act up to a proportion of the Rs 1.5 lakh limit, based on your tax slab.
ULIP plan returns are also not taxable under Sec 10D of the income tax laws. Even in the long term, it is a good idea to reduce your tax burden whether or not COVID-19 disappears.
- Long-Term Wealth Creation
The modern economy is unpredictable, with changing job trends and new industries rising and falling. Financial planning and discipline are vital. The returns from ULIP plans give you the freedom to plan your future. With the FIRE movement getting underway, a ULIP plan can provide a haven.
- Achieving Financial Goals
Planning for retirement, children’s higher education, buying a home, etc. are heavy goals that can benefit from compounding returns. Equity ULIP plan returns may be high enough over time, making these plans a useful addition to your portfolio. These funds are market-linked and thus may help beat inflation.
- Flexible Investments
ULIPs allow people to switch their portfolio allocation. This is useful in dealing with unfavourable market conditions. Some policies do not charge you when the allocation changes, either. Since you can also buy riders and top up the ULIP policy, you can modify the same plan to suit any changing financial goals.
In conclusion, a ULIP plan can be a helpful tool in planning an uncertain future. The diverse types of ULIPs provide an investment option and a chance to get considerable ULIP plan returns for almost all kinds of investors. Choose a type of ULIP that provides the extensive life cover you want and has a good performance record over a medium term.
