Life throws up several financial challenges and to effectively tackle them, one must know how to make the most of one’s investment portfolio. ULIP is one such instrument which can be tailor made to suit the diverse financial goals of each investor at different stages of life. We shall study how one can utilize ULIPs so as to derive the maximum advantage depending on one’s financial goals.
What is ULIP
ULIP stands for Unit Linked Insurance Plan, i.e. a market-linked plan with inherent insurance cover. ULIPs are long-term investment options whereby a portion of the premium payment is allocated towards insurance and administrative expenses while the latter is invested into a fund.
Each ULIP offers a variety of investment funds, with varying risk profiles and returns generated. Each fund comes with a different specified limit on the amount of debt and equity that it can take an exposure to. Further, ULIPs offer the flexibility to switch between funds during the policy term. With these inbuilt features, a ULIP insurance can help one fulfil diverse financial goals in a lifetime.
Kinds of goals: Being highly flexible in its investment structure and with the added tax benefits, ULIPs are ideal instruments for financial planning. Some of the attainable goals comprise:
- Protect your child’s future: With rising inflation and higher standards of living, a financial requirement will be more expensive tomorrow in comparison to today’s terms. This is a fundamental principle of finance i.e. the time value of money. Hence, it is important to ensure that investment returns are inflation-proof and cover escalating costs. Equity markets historically provide superior returns in this regard. Unit linked child plans enable earning market-linked returns and at the same time protect your child’s future.
- Secure funds for critical milestones: One may require funds at various milestones of your child’s life such as his/her higher education, marriage or business venture. ULIPs allow partial withdrawal facility, whereby one can access money at critical stages to meet diverse needs and prevent any shortfall of funds.
- Plan for your retirement: Retirement planning requires extensive planning throughout one’s entire lifetime to build considerable wealth on maturity as reflected in the Net Asset Value (NAV) of the fund. As equities perform well over the long term, ULIPs with its market linked performance, can enhance the value of one’s retirement corpus. Hence it is crucial to start investing in ULIPs early. In the younger years, when one has a higher risk appetite, one can opt for equity funds and gradually reduce the equity exposure and take on debt funds, as one nears retirement. During retirement, one can choose between annuity, either immediate or deferred, as per one’s preference.
As one can infer from the above, ULIPs cater to diverse investment goals and different risk profiles at varying points of time in one’s lifetime. While it is not possible to have a ‘one size fits all’ in investment, ULIP comes close to achieving this. ULIPs offer considerable flexibility to switch between funds at nominal costs, which enable fulfilling the financial needs at different points of time. One must select the best ULIP possible based on one’s financial position and future financial needs. The NAV, reflective of the fund performance, both historical as well as prospective, needs to be carefully studied to arrive at a final decision.