What is a ULIP?
A Unit Linked Insurance Plan (ULIP) is a kind of insurance policy that invests a part of the premium in financial markets in instruments such as equity, debt and any combination of the two. So, a part of the monthly premium paid by the insured is used to build a life cover and the other part is used to build an investment corpus, which can be used to attain financial goals or can be used for retirement.
Here are a few ways in which you can get better returns out of your ULIP investment:
Start Early: The Power of Compounding
This is probably the most popular suggestion that is given whenever we talk about money management, and there is a very good reason for it—the power of compounding. When money compounds, it grows relatively faster. This means that it grows faster as time passes.
For example, consider ₹10,000 invested at a rate of 10% per annum today. By the end of the year, the total profit earned would be ₹1,000, for a total accumulated amount of ₹11,000. Now, for the next year, the return will be calculated on this total accumulated amount, not just the initial principal. Hence, the total profit earned next year will be higher at ₹1,100. Moreover, as time passes, this effect grows rapidly, giving a big advantage to someone who invests early.
Choose Your Funds Wisely
There are many different ULIPs available to invest in different types of financial instruments, viz. equity and debt funds. Now, the risk carried by these instruments and the potential reward varies. Equity is riskier with a potential for higher returns. Debt is safer.
So, make sure that you understand your risk appetite and your financial goals, and accordingly choose a fund that invests in the instrument of your choice. You can also use the ULIP calculator to help you with such investments. ULIPs also allow choosing a hybrid of equity and debt that provides greater flexibility to investors. Someone who is not only willing to go all equity but also wants greater than average returns can opt for a hybrid of debt and equity.
Make sure to do your research and figure out the fund that best suits your needs; study the past performance of a few funds to see what kind of annual returns they have provided in the past. Although the past performance of a fund doesn’t guarantee the same performance going forward, it is still a good starting point to shortlist some of the funds that you would like to invest in.
Lock-in for the Long Term
Your ULIP plan invests a part of your premium in the investment of your choice. The value of these instruments can be unpredictable in the short term. Markets go up and down every day. However, in the long term, it is seen that markets tend to provide positive returns. And in the long term, compounding also starts to kick in.
Having said that, many ULIPs do allow shifting from one type of fund to another. This means that if an investor believes the equity to be riskier over the coming months, they can shift to a low-risk fund. Therefore, monitoring the markets can help investors make informed decisions about whether to stay with their current fund or to switch it up a little.
Make Sure You Understand the ULIP Tax Benefits
The premiums paid for your ULIP are tax-deductible up to ₹1.5 lakh under Section 80C of the Income Tax Act, 1961. This allows investors to deduct these premiums from their taxable income, thereby allowing a lower tax burden.
Before 2021, the maturity amount received in the case of ULIPs was also tax-free unless the policy premiums were less than 10% of the sum insured. However, this was changed in Budget 2021. Currently, if the annual premiums of ULIP exceed ₹2.5 lakhs, the maturity amount does attract taxes. If the annual premium of ULIP exceeds ₹2.5 lakhs and the total gain in the value of the fund exceeds ₹1 lakh, the investor is also liable to pay a long-term capital gains tax at 10%.
Be Aware of the Fees and Charges of Your ULIP
When you invest in a ULIP, there are some additional fees and charges that you are liable for and these vary from fund to fund. Therefore, ensure to properly research all the different charges of your fund and compare them with other funds to find the best match for you. Usually, companies charge a fee when disbursing the life cover. They also charge a fund management fee, which is used to run the operations of the fund house that manages the investment corpus.