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Why is it Necessary to Invest in ULIP for the Longer Term?


After the pandemic, financial security has become even more important than before. Even the younger generation realises the importance of saving. Saving for long-term goals, be it marriage, homeownership, child education, retirement, or any unforeseen medical emergency, has become a priority. A popular long-term investment is a ULIP or unit-linked insurance plan. Before learning about the benefits of ULIPs for the longer term, let’s learn what ULIPs are.

What is a Unit-Linked Insurance Plan?

A ULIP is an investment plan that provides you with the benefit of two popular financial products: insurance and market investments. Investments provide a means of creating wealth, while insurance guarantees financial protection in case of an emergency. In a ULIP plan, part of the premium goes to insurance coverage and the remainder goes to investing. The investment can be either into equity, debt, hybrid, or balanced funds. It all depends on the investor’s risk appetite. Investments in ULIPs have several benefits, including:

  • With ULIPs, you can switch between funds at no additional cost.
  • Investors do not need to concern themselves with two separate financial products simultaneously. They have to focus only on one product.
  • ULIPs also offer a rider benefit covering critical illness to its investors. It entails extra protection at a reasonable price.
  • Some ULIPs also offer premium benefits in the event of the unfortunate demise of the investor.
  • As per the new tax rules, ULIP premiums paid by investors are tax-deductible up to a maximum of Rs 2.5 lakh. However, this is only for new policies.

Furthermore, investors can multiply these benefits if they invest for a longer term. Let’s analyse in depth the benefits of ULIP investments over a long period.

Why is it better to invest in ULIPs for the longer term?

  1. Lock-in period
  • Most ULIPs come with a lock-in period of at least five years. Essentially, investors cannot get their money back before then. Even if an investor discontinues the plan, he or she will not get any money back until the period is over. This 5-year period instils a disciplined saving habit among investors. In addition, withdrawing before such a period incurs ULIP charges. Since the minimum period of investment in ULIPs is usually 5 years, it is best to wait the full 5 years.

  1. Penalty for early surrender
  • A lock-in period exists with ULIPs, and if the investor attempts to withdraw his/her investment before that, he/she will be liable to surrender charges and certain deductions as part of ULIP charges.

Therefore, not only will you receive the payout after the 5 years are over, but you will also receive it after deducting the surrender charges.

  1. Higher costs
  • The initial costs associated with a ULIP investment are quite high. You have to pay fees for policy administration, fund management, or fund allocation. In the early years, the charges are more significant, and they reduce with time.

  1. Higher returns
  • A ULIP provides its investors with the possibility to switch between funds as needed. Consequently, investors can switch between different assets based on the performance of funds they think will provide better returns. A fund’s performance cannot be evaluated in a shorter time frame. Accordingly, an investor can better analyse ULIP plan returns if they invest for a longer period. Investors also have the option to invest in equity funds, which as we know give the best returns when invested for a longer period.

  1. Lower risk
  • As a dual insurance and investment plan, it is less risky than other investment plans. Apart from that, since it allows investors to switch between funds and diversify their portfolios, investors are less exposed to market risk and volatility. As a result, the overall risks decrease over time.

  1. For beginner investors
  • Those who are just starting as investors always have concerns about market risks. A lot of them also don’t know which investment is right for them. ULIPs are therefore a safer investment choice since they combine multiple benefits of two investments and also offer market-linked returns with lower risk.


Final thoughts


As you read through the above article, we hope you have a better understanding of why it is beneficial to invest in ULIPs for a longer period. Investors in ULIPs benefit from tax-free exemption up to Rs 2.5 lakh on premiums on new policies, in addition to Section 80C deductions of up to Rs 1.5 lakh. In the case of further clarification, it is always advised to consult a financial advisor.


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