Insurance – the blanket of safety over any and every uncertainty in life. Be it an earthquake or theft, damage or death, an insurance gives the cushion in life to absorb any sudden damage or loss.
The fundamental principle of insurance is to spread risk among a large number of persons. A large number of people get their life/ property insured by paying a premium to the insurer. Insurance turns accumulated capital into productive investments. Insurance has the power to mitigate losses, provide financial stability and promote trade and commerce which translates directly into economic growth and development.
While this is the primary role of an insurance, in today’s new age products, insurance gives an investment channel too, especially life insurance. It enables systematic savings through the payment of general premium. New age life investment schemes also develop a chance of saving money by paying a premium.
Is It A Good Investment Vehicle?
As to the debate of whether investing in life insurance is a good idea or not, surely the conclusion is yes, investing in life insurance is a good idea. These days, with the increased costs of living and financial requirements, investing in life insurance is the most essential financial decisions a person needs to make.
Life insurance is a highly debatable topic, with the negatives talking about poor returns, rigid investing and withdrawal rules, not being suitable for wealth investments etc. While some points may find merit when compared to other investment avenues, but the core point to keep in mind here is the risk covered on death, which no other investment can provide with as much ease as life insurance.
Keeping in mind all the pros and cons of using a life insurance as an investment vehicle, here is a brief insight into ULIPs and how they are able to negate all the negatives while providing the much-needed life cover.
What are Unit linked Insurance Plans (ULIPs)?
Unit-linked insurance plan offered by life insurance companies are excellent insurance-cum-investment plans which serve the dual purpose of providing a life cover and also an opportunity for wealth creation over the long-term.
The premium paid toward a ULIP is invested in the market, thus, allowing the investor to earn market-linked returns and at the same time, there is a fixed sum assured in the event of death. The policyholder can choose to invest in equities or debt funds as per his own risk appetite.
Aggressive investors with high risk-taking capacity can opt for equity funds and conservative investors can invest primarily in debt funds or even a combination of the two. One can also move from one fund to another as and when desired.
The Tax Benefits of ULIPs:
ULIPs also are beneficial from a taxation point of view as premium paid up to Rs. 1,50,000 in a year is exempted from tax under Section 80C. Unlike traditional investments like Public Provident Fund or PPF which have long lock-in periods, ULIPs have a lock-in period of 5 years only.
Also, the entire amount received on maturity is exempt from tax just like PPF.
Investments in ULIP can be switched from equity to debt and vice-versa without any short-term or long-term tax impact, unlike mutual funds.
Though there are many tax saving options like PPF, tax saving Mutual Funds called Equity Linked Saving Scheme or ELSS, insurance policies, etc. which are available for investment but investments in ULIPs stand to gain the most as it is a comprehensive plan which provides all the advantages of a tax savings and at the same time provide the opportunity to earn market-linked returns.
Comparing ULIPs to Others
Other than ULIPs, ELSS is the only option that earns market returns but again they do not have the advantage of switching between the funds and are restricted to equity schemes only. In a ULIP both equity and debt funds enjoy tax-free returns, unlike ELSS.
Thus, ULIP is an excellent combination investment option for investors looking for market-linked returns along with tax benefits and a life cover.