How ULIPs Assist in Generating Funds?

Planning your finances correctly is crucial when it comes to building a future for yourself and your loved ones. If you have specific future goals, such as purchasing a house, saving money alone may not be sufficient to achieve them. Investing your money and growing it through investments can help you keep up with inflation and work towards your goals. One option for fund generation is a Unit Linked Insurance Plan (ULIP), which allows you to embark on your investment journey today.

ULIPs operate by investing your premium into different types of market-linked funds that offer market-linked returns. These plans are typically considered long-term, making them suitable for individuals seeking fund generation through market-linked instruments for their long-term goals.

Before delving into how ULIPs can be used for fund generation and why they may be suitable for you, let's explore the structure and workings of ULIPs.

How do ULIPs operate?

Unit-linked Insurance Plans, also known as ULIPs, primarily function as life insurance products. However, they also provide an avenue for fund generation through investments. They offer a dual benefit, allowing policyholders to protect their families from unfortunate events while simultaneously building wealth for their collective and individual financial futures.

So, how do ULIPs work? To estimate the returns you can expect from these plans, you can utilize an online ULIP calculator. This can aid you in shortlisting and selecting the appropriate plans.

Once you have decided on a specific ULIP, you can complete the purchase process online or offline. You will need to pay premiums regularly according to the chosen frequency to keep the policy active.

As long as the policy remains in force, it provides life coverage, creating financial security for your family in the event of your absence. The other aspect of the plan is fund generation, enabling you to fulfil your long-term aspirations.

Depending on your goals, you should choose the appropriate ULIP funds. There are multiple funds available, each offering varying levels of risk and returns. Your risk appetite will play a role in determining your choices.

Why may ULIPs be a preferred choice for fund generation?

Numerous plans can be combined to create an investment portfolio. However, there are several reasons why ULIPs might be suitable for fund generation. Let's examine some key factors:

• Ease of Management

When you purchase a ULIP, fund managers handle the investment aspect on your behalf. Based on your instructions regarding risk tolerance, investment horizon, financial goals, and more, the fund manager manages your portfolio. This allows you to relax as the fund manager handles decisions such as asset selection, buying and selling timing, and fund switching.

• Allows Creating a Balance

ULIPs offer a choice of funds, allowing you to tailor your fund generation journey to your risk appetite and goals. Depending on your preferences, you can choose funds that align with your life goals. This flexibility enables you to create a portfolio focused on debt, equity, or a balanced combination of both.

• Suitable for Long-Term Goals

If you opt for ULIPs for fund generation, keep in mind that they come with a lock-in period of five years. Since ULIPs utilize the power of compounding, they tend to yield substantial results in the long term rather than the immediate future. Therefore, staying invested in these plans for an extended period is often advantageous. This fosters investment discipline and encourages maintaining your investments.

• Tax Benefits

Even when used for fund generation, ULIPs offer tax benefits similar to other life insurance plans. The premiums you pay are eligible for tax deductions under Section 80C of the Income Tax Act, 1961, as per the provided provisions. According to amendments under Section 10 (10D) of the Income Tax Act of 1961, the maturity proceeds you get from ULIPs purchased after February 1, 2021, with annual premiums below Rs. 2.5 lakhs is tax-exempt. However, for ULIPs with an aggregate annual premium exceeding Rs. 2.5 lakhs, bought after February 1, 2021, the gains will be taxable as capital gains, depending on the fund type. ULIPs purchased before February 1, 2021, regardless of premium amounts, provide completely tax-free returns. Additionally, the death benefits you receive are also tax-exempt under the Act. It's important to note that these benefits can only be availed under the old tax regime.

Types of ULIP Funds

Various types of ULIP funds are available for selection. However, it is essential to remember that past fund performance does not guarantee future results. The fund types include:

1.    Equity Funds

Equity funds are high-risk, high-reward investments. These funds primarily invest in listed equity stocks and can be categorized as large-cap, mid-cap, or small-cap funds based on the type of stocks they invest in. Equity funds aim for capital appreciation through market-linked returns and can be suitable for investors with a high-risk appetite.

2.    Debt Funds

These funds invest your premium in the debt market, including debt-based securities like government securities and corporate bonds. As fixed-income instruments, debt funds carry a lower level of risk.

3.    Liquid Funds

If you happen to have a low-risk appetite and prefer relatively slow growth, liquid or cash funds may be suitable. These funds invest in money-market instruments and short-term debt securities with high credit ratings. They can be easily redeemed, making them appropriate for short-term goals.

4.    Hybrid/Balanced Funds

Hybrid funds maintain a mixed asset allocation, incorporating both equity instruments and debt securities. This allows you to benefit from capital appreciation from equity investments while also obtaining reliable earnings from debt instruments. The risk level in these funds is moderate as it strikes a balance between equity and debt instruments.

Fund generation plays a crucial role in overall financial planning as it impacts your future goals. ULIPs provide a structured plan that allows you to build market-linked wealth while ensuring a secure financial future for your loved ones.