Why a ULIP Is One of The Best Options for Long-Term Wealth Creation

Everything You Need To Know About Top-Up Premiums In ULIPs

Long-term wealth generation is the goal of almost every investor. Creating wealth by taking the long-term approach helps in a greater accumulation of returns. Along with that, the chances of your financial objectives being met are higher, too. Out of the many financial instruments available, a ULIP policy is best for long-term wealth creation. A ULIP takes care of two important financial aspects: life insurance and market-linked investment, under one plan. Let’s look at how and why ULIP can be the right option for long-term wealth creation. 

What is a ULIP? 

A ULIP policy works by dividing your premium into two broad uses. One part of your ULIP plan goes towards building your life insurance corpus. The other part is used by the insurance company to invest in market-linked instruments. A certain portion of your premium also goes towards maintenance charges, premium allocation charges, and so on. 

The portion of the premium used for investment is pooled with money from other investors. The accumulated money is then invested into the funds of your choice. There are broadly three types of ULIP policies, viz. equity ULIPs, debt ULIPs, and hybrid ULIPs. You can choose from amongst these depending on your risk-taking preferences.

Reasons to Invest in ULIPs for long-term wealth

A mandatory lock-in period of five years

ULIPs have a lock-in period of five years, which means that you are not able to withdraw any returns on your policy within that time. Though this may initially seem like an obstacle to some, in the long run, it proves to be a boon. This is because the longer you hold your investment, the greater will be the results. A 5-year lock-in period ensures that you develop a stronger sense of financial discipline. The money invested keeps on growing without any external intervention or withdrawals.

To get an idea of the returns you can expect within a period, you should use a ULIP plan calculator. Experts advise that one should have a ULIP policy for at least 10-15 years for the money to yield maximum results. 

Fund switching option

ULIPs are ideal for long-term wealth creation due to their one distinctive feature, that of fund switching. As mentioned earlier, one can invest in different types of asset classes in a ULIP policy depending on their risk appetite. However, if that particular asset class is not performing the way you had wished, you can switch your funds to another asset class. Let’s assume you have invested 80% of your funds in equity. But the markets are extremely volatile, making you worry about potential losses. In this case, you can switch those funds to debt instruments. This helps you avoid any risks without having to withdraw the money. Your money keeps on earning returns based on the interest rates set for debt instruments. 

If used strategically, this option of fund switching can help you create a large amount of wealth over a sustained period of time. Risks can be taken care of, and good results are ensured to a great extent. 

Long-term security against unpredictable situations 

Though we may try our best to live a healthy and safe life, we never know when an unfortunate situation may strike. The passing away of the earning member of the family can never be predicted. While the emotional aspect of such a situation can be dealt with only gradually, the financial repercussions can be quite devastating. 

In the absence of a life cover, the family members may find it difficult to deal with liabilities and daily expenses. They may have to dip their hands into your hard-earned life savings. Once that source is extinguished, financial problems may start occurring. With the help of a ULIP policy, you always have a life cover. A ULIP life insurance policy helps you create a long-term backup that takes care of the financial needs of your loved ones, even in your absence. 

Long-term tax benefits 

Wealth creation is not only about generating wealth but also about following a prudent tax-saving strategy. As per prevalent tax laws, the amount invested in a ULIP can help deduct tax up to Rs 1.5 lakhs. Furthermore, the returns of your ULIP are also tax exempted. As compared to other long-term investment options, the different types of ULIP policies offer substantial tax benefits. 

Tax benefits depend on amendments in tax laws and are subject to terms and conditions. 

Do consult a financial/tax expert to create a ULIP strategy that suits your current budget and is beneficial for the long-term as well.