ULIPs can feature prominently in many investment portfolios. However, are they good enough to be a long-term investment option? Read to find out.
Unit Linked Insurance Plans (ULIPs) have been a popular investment choice for many investors. This is because ULIPs provide a unique investment vehicle where the investors can benefit from insurance and investment in a single product. However, many investors may wonder whether ULIPs make good long-term investments.
Therefore, it’s essential to explore both the advantages and disadvantages of ULIPs. Once you’re aware of both sides, it should be easy to decide whether ULIP plans are the right choice for your long-term investment portfolio.
Advantages of ULIPs as a Long-Term Investment
- Market-linked Returns
You can prefer a ULIP plan with substantial exposure to equities. Historically, equities have been known to provide positive returns over a long period. Therefore, investing in ULIPs with equity exposure can result in potentially higher returns in the long term than traditional fixed-income investment options.
You can use the free online ULIP investment calculator to see how much you need to invest every month and how long it will take to get a potential return. Moreover, you can use the investment calculator to calculate potential returns for both regular and one-time ULIP investments.
A ULIP plan allows you to switch between different funds, enabling you to even switch between asset classes, such as equities, debts, etc., depending on your investment goals and risk appetite. This flexibility can be particularly beneficial for long-term investors who want to change their investment portfolio over time. However, while you may be allowed some free switches in your plan, please note that you may have to pay a small fee once you exhaust the free options.
- Tax Benefits
You can claim tax deductions under section 80C of the Income Tax Act on the premiums paid towards a ULIP. Additionally, the returns on ULIPs are tax-free under section 10(10D) of the Income Tax Act, provided the annual premium doesn’t exceed ₹2.5 lakhs in any year of the policy term.
Disadvantages of ULIPs as a Long-Term Investment
- Lock-in Period
ULIPs have a lock-in period of 5 years. So, you would require to pay surrender fees if you withdraw your investments in ULIP before the lock-in period. Therefore, you may have a disadvantage if you need to arrange funds for the short term.
However, the lock-in period can be a blessing in disguise as it would give your investments enough time to grow and compound.
- Investment Risk
Like any other market-linked investments, ULIP investments are subject to market risks. So, you should be prepared to experience volatility in returns. Therefore, investors with limited risk appetite should invest in these plans cautiously.
It might be clear by now that the advantages of a ULIP plan can far outweigh its disadvantages. However, it’s important to carefully evaluate your investment goals and risk tolerance before purchasing a ULIP.
Eventually, it can be wise to include a ULIP in your long-term investment portfolio to enhance your chances of creating wealth or a comfortable retirement corpus.