ULIPs have come a long way since their inception in India when they had a three year lock in period, high premium allocation and fund allocation charges and an offline purchase with commission charges. The low cost ULIPs of today can be easily purchased online. This has completely eliminated commission charges at the same time reducing fund management and mortality charges to a minimum.
Almost all the ULIPs available today come with a lock in of five years, however if you want to reap the advantages of ULIP over a long term, you would want to stay invested for more. If you are wondering is ULIP good for long term, here are a few reasons why:
- Disciplined saving: Early bird gets the worm. Similarly, the earlier you start saving, the more wealth you will have accumulated in your old age. An investment instrument like a ULIP helps inculcate a habit of saving in you. You set aside your ULIP premiums every month or year (depending on your premium frequency) and learn to spend in a budget. Imagine doing this till the end of your policy term. An ingrained saving sense is one of the long term benefits of ULIP that you will surely be thankful for.
- Tax exemption: You buy a ULIP one time, however, every year you can save tax on the total amount paid towards your premium till the time your policy is effective. An individual can claim the money which he/she invests in ULIP as a deduction under section 80C (life insurance) for a maximum of Rs 1,50,000 - subject to prevailing tax laws.
Not only this, the amount that you receive on the maturity of a ULIP is also exempted under Section 10(10D) of the Income Tax Act 1961 - subject to prevailing tax norms. You can avail tax exemption on premiums paid towards ULIP every year for the policy period, which is one of the biggest advantages of ULIP.
- Better returns: When you buy a ULIP, a part of your premium goes towards premium allocation charges, policy administration charges, fund management charges (capped at 1.35 percent) and the life cover charges as per the policy terms and conditions. New regulations have fairly minimized these charges so that the net reduction in yield upon maturity is low. One of the long term benefits of ULIP, if you stay invested for more than 10 years is that it helps you even out these charges substantially, thanks to the power of compounding.
- Flexibility of investment: Since ULIPs are market-linked instruments, a longer policy tenure will see you through different market cycles. This not only gives you the benefit of rupee cost averaging but also helps balance any losses due to short term movements the market might be going through. You also have the flexibility to switch among funds provided by your insurer as per your financial needs and risk appetite. This diversity of funds is one of the advantages of ULIP over long term when it comes to wealth creation.
What’s more, some insurers return the mortality charges deducted during the policy term as a reward to those who have completed the policy term. You should have paid all your premiums on time without any delay to qualify for this. Some ULIP plans also offer loyalty benefits which when added to your savings amount on maturity can make you happier than ever.
You can use the ULIP calculators available online to help you with the estimated value of your investments in the future. You can also add critical illness and accidental death riders to your policy for more protection thus giving you additional life cover. The benefits are endless. All this information should help banish any questions such as ‘is ULIP good for long term?’ Because evidently, it is and there is no denying that.
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