ULIP – Is it required as an investment option or as a risk cover?

 One of my followers on social handle recently asked me a question, why do we save money?

A simple question yet very powerful according to me, there is no one answer.

This question just stayed with me and I decided to write this piece around it. So, why an individual saves money?

I can think of 3 reasons –

·        To create wealth for a specific financial goal and to build a corpus for family

·        To earn potential returns on investments

·        To save taxes

So, now the next question that comes, where does one invest? Is there any single financial instrument that can give the flexibility to cover all the reasons listed above?

Let me start with asset allocation. Diversification is important in the overall process of wealth creation but you also need to look for avenues that provide investment opportunity with protection. 

Coming back to the question on single financial instrument that can provide best of both the world? Yes, it actually exists. You can consider investing in ULIP.

ULIP provides you with the opportunity for wealth creation in a secure and disciplined way. ULIPs in their new avatar are increasingly becoming cost efficient and compete well with most flagship mutual fund schemes in all categories. A lot of ULIP schemes come without premium allocation and policy administration cost. Taking into consideration their tax effectiveness both in terms of tax saving u/s 80C and exemption of maturity amount u/s 10(10D), they lead the race by quite a distance. Add to it the life insurance cover (which is typically 10x of the annual premium paid) and they become a must in every investor’s portfolio especially when the investment horizon is 7 years and more.

ULIPs also offer variety of funds under equity and debt category which makes it easy to manage one’s asset allocation. One can decide the asset allocation based one’s risk profile and time to goal. The switch option gives flexibility to move between equity and debt funds without attracting any cost or tax implications. While ULIPs do offer life insurance cover, to cover one’s risk adequately, one should definitely look at term plans which offer a larger insurance cover at a fraction of cost.

Typically for financial goals which are at least 7-8 years away, ULIP should form an important part of one’s investment portfolio. Not only are they cost efficient compared to mutual funds, they also have an edge when it comes to taxation of capital gains. Capital gains (short term & long term) in case of mutual funds are taxable, whereas the same in case of ULIP is completely exempted. Larger the investment horizon, larger is the savings in terms of cost and taxation. This gives ULIP an edge over mutual funds.

Also, the 5 year lock in period of ULIP will set in discipline of investing regularly and also, you can reap the benefit of compounding if one stays invested for the long term.

In my personal opinion, ULIP is a great financial instrument and is a must have in one’s asset allocation strategy. The only risk factor not just with ULIP, but any financial instrument is that you understand the product before you buy it.

What do you think? 

Edelweiss Global Investment Advisors (EGIA), part of the Edelweiss Group, is one of India’s foremost wealth & asset managers with over USD 20 billion in assets under management. Personal Wealth Advisory business is the wealth management and broking arm under EGIA. It has highly trained and specialized team of over 600 advisors who engages with clients and has close to 70 offices across the country.

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(Disclaimer: The details and investment tips expressed by the expert in the article are his personal views. We advise you all to check with your certified financial advisors before taking any investment decisions. Investments in securities market are subject to market risks, read all the related documents carefully before investing.)