Top 5 Benefits of ULIPs [Unit Linked Insurance Plans]

When it comes to financial planning, people often juggle between securing their future with life insurance and growing their wealth with investments. But what if you could have the best of both worlds? Enter Unit Linked Insurance Plans (ULIPs)—a solution that offers the dual benefit of insurance coverage and investment opportunities. ULIPs provide policyholders the chance to build wealth over time while ensuring their loved ones are financially protected in case of unforeseen circumstances. With the increasing focus on financial independence and smarter investment strategies, ULIPs have gained significant popularity in India. But what makes them truly special? Here, we’ll explore 5 key benefits of ULIPs that make them a compelling choice for investors, especially in today’s fast-paced world:

1. Dual Benefit of Insurance and Investment

ULIPs uniquely combine life insurance with investment, giving you a two-in-one solution. With a portion of your premium allocated toward life insurance and the remaining part invested in various funds—be it equity, debt, or balanced funds—you enjoy both protection and growth.

The life insurance component ensures that your family remains financially secure if something unfortunate happens to you. Meanwhile, the investment portion lets you grow your wealth in line with your financial goals. You can even choose how much risk to take, depending on your risk appetite. For instance, if you’re a risk-taker, equity-heavy funds may suit you, while conservative investors may prefer debt funds.

A report by the Insurance Regulatory and Development Authority of India (IRDAI) shows that ULIPs have grown significantly over the past few years, attracting a substantial number of policyholders seeking both protection and wealth creation.

Read More: What is ULIP and How Does it Work?

2. Tax Benefits Under Section 80C and 10(10D)

One of the most attractive benefits of ULIPs in India is the tax advantages they offer under the Income Tax Act, 1961. Premiums paid toward ULIPs are eligible for tax deductions under Section 80C, up to a limit of ₹1.5 lakhs per financial year. Additionally, under Section 10(10D), the maturity proceeds (subject to certain conditions) are also tax-free, making ULIPs a highly tax-efficient investment.

Tax-saving investments like ELSS or PPF may offer similar benefits, but the dual advantage of tax saving along with wealth creation makes ULIPs stand out. For individuals in the higher tax brackets, these savings can be substantial and help build a solid financial base for the future.

The tax efficiency of ULIPs has been one of the reasons why millennials and working professionals are increasingly opting for these plans, given that it not only reduces their taxable income but also helps in growing their wealth.

3. Flexibility in Fund Switching

One of the most underappreciated yet powerful features of ULIPs is the ability to switch between funds—be it from equity to debt or vice versa—without incurring additional charges. This flexibility is crucial, especially during market volatility, allowing you to adjust your investments based on market conditions and risk tolerance.

For example, when markets are bullish, you can shift your investments into equity-heavy funds to maximize returns. On the flip side, during uncertain times, you can move to debt or balanced funds to safeguard your wealth. This flexibility in fund management is rarely offered in traditional insurance policies or fixed-return investments.

ULIPs typically allow multiple free switches within a year, giving you full control over how your investments are managed. Studies suggest that during market fluctuations, savvy investors who actively switch between funds tend to outperform those who remain passive, which highlights the importance of this feature.

4. Long-Term Wealth Creation Potential

While ULIPs are known for their insurance component, their true power lies in their long-term wealth creation potential. The longer you stay invested, the better your returns, thanks to the compounding effect. ULIPs are typically structured for long-term investment horizons (5 years and beyond), making them ideal for building a solid corpus for life goals like children’s education, retirement, or buying a home.

A 2022 survey by the Life Insurance Council revealed that policyholders who had stayed invested in ULIPs for over 10 years saw returns that outpaced inflation and matched or even surpassed the performance of some mutual funds. This highlights the potential of ULIPs as an effective long-term wealth-building tool.

Moreover, the lock-in period of five years helps inculcate a disciplined approach toward investing, encouraging you to stay committed to your financial goals rather than succumbing to short-term market fluctuations.

5. Partial Withdrawals for Emergencies

ULIPs offer the option of making partial withdrawals after the five-year lock-in period, which can be incredibly useful in case of financial emergencies. Whether you need funds for medical expenses, higher education, or a family function, you can tap into your ULIP without surrendering the policy.

Unlike traditional life insurance plans, which require a full surrender to access the funds, ULIPs allow you to withdraw a portion of your accumulated corpus while keeping your policy intact. This feature provides liquidity, which is often missing in other long-term investments like PPF or NPS.

Consider the example of Ravi, a 35-year-old ULIP policyholder. Two years ago, his father underwent an unexpected medical procedure. Instead of taking a loan or breaking his fixed deposits, Ravi was able to partially withdraw ₹2 lakhs from his ULIP, covering the medical expenses without any financial strain. The best part? His policy remained active, and the investment continued to grow, providing him with peace of mind for the future.

Read More: Top 5 Tax-free Investment Options in India

Conclusion: Why ULIPs Are Worth Considering

In today’s financial landscape, Unit Linked Insurance Plans offer a unique blend of investment and insurance, providing the best of both worlds. From tax benefits and flexibility in fund switching to long-term wealth creation and liquidity options, ULIPs cater to diverse financial needs. Whether you’re planning for retirement, children’s education, or simply want to grow your wealth while safeguarding your family, ULIPs can be a valuable addition to your financial portfolio.

The numbers speak for themselves—over 30% of life insurance premium collections in India come from ULIPs, and with tax advantages, policyholders are making the most out of these versatile plans. When chosen wisely and managed actively, ULIPs have the potential to outshine other investment options, making them a smart choice for anyone looking to combine protection with wealth creation.

These tips are brought to you by HappyWise Financial Services.

If you need any assistance with organizing your finances or want to discuss your investment options, feel free to connect through Email or Whatsapp.

Disclaimer: Some part/s may be generated/modified using GenerativeAI