Retirement planning is an important part of one's financial journey, and choosing the correct investment instruments to establish a healthy retirement portfolio is not a simple undertaking. Unit Linked Insurance Plans (ULIPs) have grown in popularity among the different options available in recent years.
ULIPs provide both insurance coverage and financial options, making them an appealing option for retirees. It allows you to invest in high-risk equities funds with larger returns, low-risk debt funds, or a combination of both, depending on your risk tolerance. We will delve into the matter in this post and present insights to assist you make an informed decision about including ULIPs in your retirement planning.
One of the primary reasons why ULIPs should be included in your retirement portfolio is their ability to generate long-term wealth. Individuals can participate in equity funds through ULIPs, which have consistently outperformed traditional fixed income vehicles in terms of returns. Individuals can profit from the power of compounding and develop significant wealth over time by investing in ULIPs for a longer period of time.
ULIPs also provide considerable tax advantages, making them an excellent addition to any retirement portfolio. Individuals can claim tax deductions for ULIP premiums paid up to a maximum of Rs. 1.5 lakh per year under Section 80C of the Income Tax Act. Furthermore, under Section 10(10D) of the Income Tax Act, the maturity proceeds from ULIPs are tax-free, making them a tax-efficient investment alternative.
"Because the cost of mortality is higher for older people, ULIPs are unsuitable for pre-retirement portfolios." "The monthly debit of units to cover mortality costs can eat away at one's accumulated units over time," explains Shailesh Kumar, Insurance Samadhan's Co-Founder and Insurance Head.
A 60-year-old paying Rs. 1000 per month for a Rs. 10 lakh policy, for example, would spend more than a 40-year-old paying Rs. 150 per month. Even market changes can have an impact on one's units, with positive market conditions debiting fewer units and negative market situations degrading more units. For example, when the NAV reaches Rs. 50, only 200 units are deducted, however 250 units are debited when the NAV falls to Rs. 40.
Another benefit of ULIPs is the flexibility and control they provide. ULIPs, unlike typical insurance plans, allow individuals to choose between multiple funds based on market conditions and risk tolerance. Individuals might progressively change their investments from equities funds to debt funds as they approach retirement to reduce risk and preserve the acquired corpus.
"ULIPs can be a part of your retirement portfolio if you have a long investment horizon of 15-20 years," says Rakesh Goyal, Director, Probus Insurance broker. Investing Rs. 10,000 each year for 15 years at an expected return of 8% can grow your money to roughly Rs. 2.5 lakhs. To minimise confusion later, one must grasp the product dangers and charges involved."
ULIPs give not only investing rewards but also life insurance coverage. This is especially advantageous for those who do not have separate life insurance coverage. The life cover provided by ULIPs assures that if the policyholder dies, their family will receive a lump sum payment to meet their financial needs and maintain their quality of living.
"Based on the past ten years' performance, an individual can expect to earn 11-20% annual returns on ULIP investments." It is a market-linked product with the potential to develop a corpus for retirement if the investor is ready to assume certain risks. "The product is a great addition for early retirement planners and young individuals," says Nitin Mehta, Chief Customer Officer & Head of Marketing, Digital & Online Sales, Bharti AXA Life Insurance.
However, before investing in ULIPs, it is critical to thoroughly understand the terms and conditions, charges, and potential hazards. A financial advisor can help you assess whether ULIPs are appropriate for your retirement goals and risk tolerance. Finally, a well-structured retirement portfolio should include a variety of investment options, and ULIPs can be an important component of the overall approach.
