The initial years of working bring with them a sense of excitement and the power of becoming independent. Young professionals dream big and think of using these funds to fulfil their dreams of travelling, buying a big car, and enjoying life without much thought about the future. But, in fact, this is the time when they need to think about saving and investing for their future dreams. The youth cannot afford to ignore financial planning and the benefits of starting early. Along with enjoying their new economic freedom, they need to look for ways to create wealth through mindful investing in stocks and other financial instruments.
Another important component of their financial planning should be to take a life insurance policy for securing the future of their old parents in case something unfortunate happens. While term policies are quite popular, they are pure death policies with no other benefit. In contrast, a ULIP or Unit Linked Insurance Plan offers double benefits of providing an insurance cover and creation of wealth through investment. ULIP schemes come with an added advantage of tax benefits.
Why Choose ULIP?
Stock markets tend to attract investors of all ages – including young professionals. But the lack of appropriate knowledge and experience often deters them and makes them stay away from equity investments. ULIP policies offer them a chance to invest in equities and other financial instruments without needing to study and research individual stocks and companies.
One of the main reasons to choose a ULIP is that it offers the dual benefits of insurance cover and wealth creation. The premium paid by the investors is divided into two, with one part called the mortality charge going towards the insurance, while the other part is invested in either equities or debt or a combination of both.
Some benefits of ULIP Plans are:
- Compounding- Investors can benefit from the compounding effect and create a good corpus for funding their long-term goals.
- Wide Choice– Investors have the choice of investing in a wide variety of instruments like stocks, bonds, money market instruments, or a combination of these. They can choose the investment portfolio keeping in mind their risk appetite and the goals that they wish to achieve.
- Option to switch– Investors have the option to change their asset allocation at any point of time during the policy tenure and even switch their portfolio management strategy several times. These changes can be in response to a change in the risk appetite, goals, income levels or the performance of a fund in which they have invested.
- Tax Benefits-The premiums paid, the maturity amount and the returns earned from ULIP investments are all tax-exempt, subject to certain limits and conditions.
- Additional Covers– Investors can choose additional coverage through the purchase of riders like accidental coverage, disability coverage and critical illness covers, and payment of additional premiums.
- Increase in Coverage– Young professionals or other ULIP investors can choose to increase their coverage and maturity amount through top-up premiums.
Choosing the Right ULIP Policy and Investment Option is Important
Different types of investment options are available under a ULIP plan and investors can choose the one that matches their goals and risk appetite. Commonly offered options are:
- Debt Funds- These funds invest in low-risk debt instruments like corporate bonds and government securities. These funds are highly suitable for investors with low-risk appetites but generate relatively lower returns than equity investments.
- Equity Funds– These funds invest in stocks and carry a higher risk in comparison to the debt funds. The scope of earning good returns is higher in the case of these funds.
- Balanced Funds-Offering a stable investment option, these funds invest in both equity and debt instruments. These medium-risk funds are highly suitable for investors looking to balance the risks associated with equity with the stable returns offered by debt.
Choosing the right plan is important to achieve the set goals. A ULIP also offers the investors a chance to modify or change their asset allocation during the policy period. This feature ensures that investors do not feel stuck and contemplate withdrawing their funds before the end of the policy’s tenure. Investors can also use a ULIP calculator to check the returns that they can expect at maturity after investing a specific amount for a specific number of years. Before investing in a ULIP scheme, investors should check about the various applicable charges and their impact on the expected returns.
To conclude, young professionals should look at investments in ULIP to fulfil the dual objective of having a life insurance cover and creating wealth through investments. An early start will help them benefit from compounding and staying invested for a longer duration will lead to better returns.