Multiple investment options are available today, and two of the most popular ones are ULIPs or unit-linked investment plans and endowment or savings plans. These offer an opportunity to get insurance coverage and build wealth for the long haul. But deciding between the two can be tricky. Should you choose a ULIP over a savings plan? Here are some key parameters to be kept in mind before deciding on the right option.
Defining ULIPs and savings plans
A ULIP stands for a unit-linked insurance plan, an investment option which combines investments and insurance for policyholders. This ensures life insurance coverage for the policyholder, while you can also deploy investments through the premium into funds to earn higher future returns. Investors can also grow wealth in the long term with an accompanying safety cover. Investments are made in debt, equity funds, or even a combination of these fund types.
On the other hand, a savings plan is a conventional life insurance option which comes with endowment advantages. This plan provides the dual benefits of life insurance coverage and higher savings. In India, two kinds of plans are offered in this category: non-participating and participating. The latter provides multiple advantages, including bonuses, while the former provides guaranteed returns minus any extra benefits such as bonuses.
What are the key differences?
Before you work out the expected ULIP returns using a ULIP calculator, you should first differentiate between savings plans and ULIPs. The most significant difference is that a ULIP offers a combination of insurance and investments for growing future wealth, while a savings plan provides a combination of insurance and savings. The latter category has either bonuses or guaranteed returns with life insurance coverage.
Benefits of investing in ULIPs
While investing in either of the two financial products is a prudent choice, there are some advantages that ULIPs have over conventional savings plans.
- Higher potential for earning handsome returns – ULIPs enable investments in debt or equity funds or even a combination of these two types. This will help you earn handsome market-linked returns throughout the long haul. With the help of ULIPs, you can also tap into the power of compounding, which will grow your corpus substantially over the long haul.
- You can personalize as per your risk appetite – ULIPs ensure the ability to personalize investments as per your appetite for risks. For example, if you happen to be an investor who can aggressively take risks, you may choose investments in equity funds. However, those investors who are risk-averse may choose investments in debt funds. If you are an investor who is up for taking moderate risks, you may select investments in a fusion of debt and equity funds.
- You can easily switch funds – You can readily switch across funds with ULIP investments. This is a significant advantage. You can always re-align your investment as per changing market conditions. For example, you may wish to take higher risks when you are young, switching to comparatively low-risk options as you grow older.
- Top-up options – ULIPs enable investments of extra amounts with your current premiums. This helps you top-up investment options, helping you leverage additional cash while keeping it parked in idle avenues.
- Rupee cost averaging benefits – When any fixed amount is invested every month for a long duration, your investment cost will naturally be averaged out accordingly. This will help you earn more from your investment and get higher benefits over a lengthy tenure.
- Inflation-countering abilities – With inflation rates rising continually, the monetary value may go down for your investment. With ULIP investments, you may comfortably get market-linked investment returns that surpass inflation rates.
- Tax advantages for investors– You can invest up to Rs. 1,50,000 for a particular financial year to get tax deductions under Section 80C. You can also get tax exemptions on the death benefits under Section 10D, as long as the sum assured in your policy is at least ten times the annual premium. You can also get LTCG (long-term capital gains) tax exemptions on the maturity benefits. For ULIPs, the maturity amount will be free from taxes if the aggregate and annual premiums are within Rs. 2.5 lakh. If this surpasses Rs. 2.5 lakh per year, capital gains tax will be payable on the income earned on the same.
Which one should you get?
Finally, which one of the two is right for you? It boils down to your particular needs. Those with a higher risk appetite may consider ULIPs since they ensure the best combination of insurance and investments. You can comfortably get life insurance coverage while growing your wealth in the long-term. This can help you meet future goals as well.
On the other hand, those with a moderate risk appetite and a more conservative approach towards investments can choose savings plans. This will give them insurance coverage and the chance to accumulate a sizable corpus at the end of the policy tenure. This can then be used for meeting various future needs. It all depends on your perspective, goals, and risk tolerance.
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