Why are ULIPs a Good Investment for a 20-Year Horizon

One of the best financial products in India to invest in, a Unit Linked Insurance Plan or ULIP has several benefits to offer to its investor. The primary being the fact that a ULIP serves a dual purpose – of providing an insurance benefit to the policyholder as well as offering the opportunity to enjoy the benefits derived from investment in capital stock.

Owing to its dual benefit, most investors like to put their money in ULIPs. It is no wonder then that a ULIP plan has undergone several changes over the years to better suit the needs and preferences of its prospective investors. For instance, the initial ULIPs that were first introduced in India came with a three-year ULIP lock in period, which later changed to a ULIP lock in period of 5 years on public demand

What is a ULIP Lock-in Period?

We learned in the section above the exact ULIP meaning and what is a ULIP plan. Now let’s quickly understand the meaning of the term lock-in period when it is used in the context of ULIPs in India.

A ULIP lock in period refers to the total time duration during which an investor is discouraged, sometimes even restricted, to withdraw the money invested into the plan, either partially or fully. It is only after the completion of the lock-in period that the investor can reap the benefits of their investment through withdrawal.

In India, the ULIP lock in period is set to 5 years, before which a withdrawal may attract a surrender fee from the investor. However, with the growing popularity of ULIPs in the country, the general consensus is slowly moving towards the idea of investing in ULIPs for longer (than 5 years). This is because the longer the investment in a ULIP, the longer one can enjoy the benefits of their investment.

This is why a large number of investors in India are slowly considering staying invested in a ULIP policy for at least 20 years in order to continue reaping the benefits from the investment for longer.

Why Investing in a ULIP Plan for a 20-Year Horizon is a Good Idea?

So does this mean now that the 5-year for ULIP lock-in period  is slowly going to be scrapped? Perhaps not or not so soon, at least. Nearly all the ULIP plans offered by insurance companies today provide a standard 5-year ULIP lock in period to the investor. However, it is generally wiser to invest in a ULIP for a longer term, say 20 years. Investors state here’s why:

1. Investment in ULIPs attracts tax rebates: The best part about investing in a ULIP policy is that the premium payable on the plan is tax-deductible. And the longer you stay invested in a ULIP plan, you stand a chance to enjoy tax concessions every single year on the total premium amount paid. This is as per the taxation rules laid out under Section 80C (life insurance) of the Income Tax Act, 1961. Note that the tax rebate is applicable on an investment of Rs. 1.5 lakh.
2. Allows flexibility to switch between different funds: This is yet another advantage that you can enjoy when you choose to invest in a ULIP for longer. ULIPs are directly linked to the market and therefore as a ULIP investor, you have the flexibility to switch between different funds that may be performing well in the capital market at a given time, in case the one provided by your insurer fails to deliver the same profits. This flexibility helps the investor generate more wealth in the longer run.
3. Allows for regular savings for longer: ULIPs are one of the best financial instruments to inculcate a habit of regular saving in an individual. Investing in a ULIP policy at an early age would ensure that you have a sufficient corpus built towards the end of the policy term. And if you choose to continue investing and saving for longer, it definitely means a huge corpus that can adequately cover the financial needs of you and your loved ones for a lifetime.

ULIP vs. Mutual Fund

Most investors often tend to get confused between these two financial instruments – ULIPs and Mutual Funds. However, the two are indeed different and it’s a good idea to understand the key differences between both before choosing to invest in either one. The following table clearly illustrates how ULIPs differ from Mutual Funds:

Parameters	ULIPs	Mutual Funds
Term of policy	Generally long-term plans	Can be for a short, medium, or long term as per the financial needs and goals of the investor
Purpose of the plan	Wealth generation via investment and insurance coverage both	Only wealth generation through investment
Lock-in period for the policy	Usually 5 years	Most mutual funds have no lock-in period, with a few exceptions being children’s funds, ELSS funds, and retirement funds
Regulatory Body for the plan	ULIPs fall under the regulation of the IRDAI	Regulated by SEBI
Tax concessions under the plan	Premium payable for the ULIP is tax-deductible up to Rs 1,50,000 under Section 80C of the ITA, 1961. Maturity benefit is also free of tax payment under Section 10(10D) of the Act.	ELSS funds are eligible for tax rebates up to Rs. 1,50,000 under Section 80C of the ITA

In a Nutshell

ULIPs are a great way to save and reap the benefits of those savings made over a long period of time. We learned in the blog about what is a ULIP plan, that it is both an investment and insurance product and, hence, its demand is generally higher among the investor community. It’s wiser to consider investing in a ULIP plan for at least a 20-year horizon to reap its benefits over a lifetime. To compute the exact benefit amount that can be derived from a ULIP investment, you may look up a ULIP calculator online. Besides, you can also browse through the best ULIP plans available in the market on PayBima.