RIGHT FINANCIAL TOOLS FOR WEALTH CREATION: UNDERSTANDING ULIPS AND ENDOWMENT PLANS

 

wealth creation

In today’s scenario, everyone understands the importance of investing for the future. Everyone understands that it is necessary to build a comfortable corpus to meet our future financial goals and objectives. Among all the available investment tools in the market, insurance is one of the most important tools to plan for your future financial goals and objectives, as well as for protecting your family from any unexpected incidences and fulfilling their dreams and aspirations even in your absence. One might consider Unit-Linked Insurance Plans (ULIPs) or Endowment Plans to meet his or her financial goals. Both offer insurance coverage with added benefits. Let us understand how to choose the right plan as per your needs and goals.

What is ULIP?

The full form of ULIP is Unit Linked Insurance Plan. ULIP is an insurance plan that offers the dual benefits of insurance and investment. Insurance is to financially protect your family and investments to fulfill your long-term goals. A part of the premium paid for ULIP contributes towards insurance coverage, and the remaining is invested in the funds as chosen by the investor based on his or her risk appetite and financial goals. The performance of the funds plays a crucial role in the returns received in ULIP.

What is an Endowment Plan?

An endowment plan is a traditional life insurance policy that offers an additional savings component. It offers insurance coverage as well as helping you grow your money. It has a fixed term that pays out a lump sum equal to the sum assured on maturity, as well as fixed and guaranteed returns that are fixed at the time of purchase of the policy. The beneficiary receives the sum assured if something happens to the policyholder during the policy term, following which the policy ends. It can be used to save money to fulfil various goals like buying a house, paying for your child’s education or marriage, starting a new venture, and more.

Benefits of ULIPs and Endowment Plans:

Insurance Coverage: Both ULIPs and endowment plans provide life insurance for the policyholder, giving their loved one’s financial stability and security in the future in case of any unexpected event.

Returns: ULIPs offer market-linked returns along with life cover and have the potential to provide higher returns based on market conditions.

Endowment plans offer a fixed and guaranteed amount at maturity. One can opt for a policy with profits to get the sum assured plus accrued bonuses on maturity. Endowment plan returns may be lower than ULIP returns.

Lock-In Period: The minimum lock-in period for ULIPs is five years. They promote disciplined investing, which aids in long-term corpus building.

Depending on the chosen policy, endowment plans have a lock-in period that can last anywhere between three and five years.

Investment Decision: Policyholders can choose their investments using ULIPs. The policyholder can make fund allocations as per his or her choice, and have the option to change it later to take advantage of changing market conditions.

Endowment plans do not allow policyholders to make any investment decisions.

Transparency: Policyholders can track fund performance and view fund allocation while investing in a ULIP policy. The investment portfolio is not disclosed by endowment plans. However, policyholders know what to anticipate because the maturity benefit is a guaranteed return.

Withdrawals: Partial withdrawal of funds is possible from the collected ULIP corpus in cases of financial emergencies. These withdrawals are tax-free and help provide liquidity in times of need. There are constraints and penalties when withdrawing funds from an endowment plan. 

Benefits of Investment in a ULIP:

ULIP is a good option to pursue high returns to meet long-term financial goals and objectives. There are numerous benefits to investing in ULIPs as mentioned below:

Offer flexibility:

·         To choose your fund option based on expected returns and risk appetite.

·         To increase the sum assured over the term of the plan

·         To top-up one’s premium

·         To opt for a rider

Offer transparency:

·         Policyholders can track fund performance and view fund allocation while investing in a ULIP policy, as well as make informed decisions based on:

·         Benefit illustration

·         Product brochure and key features

·         Free-look period

·         Fund performance based on Net Asset Value (NAV) updates

Encourage goal-based investments: ULIP helps with long-term systematic investments to fulfill necessary life goals like buying a home, paying for children’s higher education, retirement planning, etc.

Offer tax benefits under Section 80C and Section 80D.

Offer liquidity in case of emergency: It offers partial withdrawal of money after the 5-year lock-in period. With the help of this feature, one can withdraw a certain percentage of money from their policy in times of need.

Conclusion

ULIPs are a smart choice as an investment option if you want market-linked returns, transparency, and flexibility. Make sure to identify your financial objectives and give each one a timetable before choosing a ULIP. Consider your level of risk tolerance while selecting investments. You can use your ULIP investment to support your goals if you have a clear understanding of what you're aiming for.

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