Life insurance is one of the most important financial decisions that you will make. It protects your loved ones and allows you to leave them a significant non-taxable sum in case of uncertain times. Such policies also cover your mortgages and assure a steady financial future for your family. Various types of insurance policies are available today. Still, if you are looking to save tax and capitalize on the investment without taking on much risk, a Unit-Linked Investment Plan (ULIP) is the ideal option. 

What is a ULIP?

You may be inquisitive to know what is ULIP. It is a type of goal-based financial plan that offers the dual benefits of insurance and investment. Investing in ULIPs is one of the best ways to enter the equity market and earn generous returns in the long term. ULIPs allow you to receive a good return on investment and provide financial protection to your family in the form of life insurance.

ULIP investment has a minimum lock-in tenure of five years, which means that you cannot withdraw the payouts within this period. 

Why is ULIP better than other traditional life insurance plans? 

Investing in ULIPs is more suitable as compared to traditional life insurance policies, as they provide a higher return through exposure in the equity market. Here are a few prominent plus points of investing in a ULIP.  

• Helps to reap the benefits of compounding

Since a ULIP has a minimum lock-in period of five years, it is an excellent option if you are searching for investment plans that can be beneficial in the long term. For instance, if you invest in ULIP funds for ten to fifteen years, you can get the advantage of compounding. In simple terms, compounding refers to ‘interest on interest’. Compounding interest is a process that helps investors multiply their income by reinvesting the amount earned from capital gains.

• Allows selection between equity and debt funds 

Based on your risk-bearing capacity, you can decide whether to invest in equity or debt funds. Equity schemes provide a better return, but the risk involved is also high. Conversely,a debt fund is a low-risk, low-return investment alternative. You can also choose a hybrid fund, which is a combination of equity and debt funds, to strike a balance between both. 

• Provides the option toswitch from one fund to another

 You can efficiently manage your portfolio as a ULIP fund offers the flexibility of moving from one fund to another to avail of better returns. Therefore, it allows you to diversify your investment across various asset classes. Diversification of investment reduces the risk drastically. The profit of one asset class can absorb the loss incurred by another asset class. Therefore, depending on your long-term financial goals, you can decide the ratio of investment between equity and debt funds. 

• Aligns your investment based on financial goals

The motive behind any investment is to earn a better return in the future. Besides providing insurance coverage, a ULIP investment can help you to meet future financial demands, like your child’s higher education and wedding or your retirement.

• Offers tax benefits

As per Section 80C of the Income Tax Act, the premium that you pay towards the ULIP is eligible for a deduction of up to INR 1.5 lakh per annum. Moreover, the amount that you earn on maturity is tax-free under the same Act.

Therefore, ULIPs are the perfect investment avenue when it comes to providing financial cover to your family during your absence. Additionally, they provide optimal returns on investment. They are versatileand help you save on tax as well.