Here’s how ULIPs help you maximise your savings

If someone were to ask you about the two major financial goals that you want to meet through your financial plan, what would they be? It is highly likely that you look at two overarching functions - one, the provision of insurance to protect against uncertainty and two, an avenue for investment that can bring you steady returns to fund your goals in the short, medium and long term. A financial instrument that can effectively serve both of your financial needs is the Unit Linked Insurance Plan (ULIP).

What are Unit Linked Insurance Plans (ULIPs)?
ULIPs are a great financial vehicle in that they combine both insurance and investments under a single integrated plan. They provide wealth creation avenues along with a life cover. How? The premium that you pay under a ULIP goes partly towards a life insurance plan and a portion of it goes into a fund that has a varying combination of debt and equity. This fund usually matches your financial appetite and risk profile - for example, if your long term goal is to provide for your children’s education then you may want to invest in a fund that brings assured funds. On the other hand, if you like taking larger risks in order to reap greater returns, you may want to divert your investment to equity-heavy funds.

Now, the question arises: how can you, as an investor, make the best of your investment in a ULIP?

Here's how you can maximise your savings with ULIPs:
For starters, you should consider using the switching and premium redirection facility offered by ULIPs to your full advantage. What does that mean? It means that you should keep altering the combination of funds you are invested in, in accordance with the market conditions and your personal needs. You should, therefore, consider moving your investment into debt funds when the markets are climbing and into equities when the markets are down, and towards the maturity period, move to a more balanced portfolio. 

Secondly, you should try to understand the tax benefits involved when you invest in ULIPs. They can act a great tax-saving instrument in your financial portfolio. Like any other life insurance policy, the life cover premium paid towards a ULIP is allowed as a deduction under Section 80C of the Income Tax Act up to a limit of Rs 1.5 lakh. The ULIP tax exemption also extends to the withdrawals made or amounts received as a part of the policy i.e. the death benefit received by the beneficiary upon the death of the policyholder, the sum received by the policyholder upon the maturity of the policy, or any partial withdrawal made by the assured during the policy term under Section 10(10D) of the Income Tax Act. On the other hand, the payouts under mutual funds are totally taxable.

On top of these, ULIPs are also exempt from Long Term Capital Gain (LTCG) tax, which gives them an edge over other market-linked investment tools like mutual funds. That does sound like a financial instrument for all your tax-saving needs, doesn't it?

Finally, in order to make the best use of your investment in ULIPs, try to cash in on the power of compounding (the concept of lock-in period).  It helps the money grow through the power of compounding if you are invested for a longer period say 10-15 years. A ULIP anyway comes with a lock-in period, so it is better to stay invested long-term. 

Thus, to get maximum benefits from your ULIP, the mantra is to stay invested long-term and switch your portfolio in tandem with the market performance.

`In the policy the investment risk in the investment portfolio is borne by the policyholder