Why You Should Invest Early in ULIPs

For those who seek something beyond the usual life insurance cover, a ULIP policy is the best option. The policyholder can not only get protection for the future of their loved ones but also an avenue to invest in financial instruments and gain returns. One never knows when an unfortunate event might strike and lead to their demise. Such a situation becomes even more difficult for the loved ones to handle if they were financially dependent on the person. Such issues can be alleviated with a well-made life insurance plan. However, some may want more than the basic life cover. This is where a ULIP comes into view. 

While ULIPs are for all age groups, it is believed that, ideally, one should invest in one as early as possible to gain the maximum ULIP benefits. Why so? Let’s take a look. 

How does a ULIP work?

We must first understand how a ULIP works. Insurers pool together portions of the policyholders’ premium payments and then invest it in equity funds, debt funds, or a mix of both. Depending on your share of the total investment, the insurer issues units to you. The returns you receive are dependent on the performance of the market and on the number of units you own. The more the units, the higher your returns. As the returns are based on market performance, ULIPs tend to be risky. However, note that the life cover is not affected regardless of how your investment performs. 

Now that the functioning of ULIPs is clear, let’s look at some ULIP benefits that you can enjoy when you invest in them early. 

The premiums are lower 

The premium of a life insurance policy is highly dependent on the age of the policyholder. So, the younger the policyholder, the lower will be the premium. This is because the premium is calculated based on how much risk the individual possesses. During a younger age, for instance, in the 20s or early 30s, an individual is relatively healthy, leading to reduced risks for the insurer. With this low premium, you can start creating an ample life corpus from a relatively early age. You can increase the coverage aspects as and when you undergo different stages in life. 

You get to experience the magic of compounding 

For the uninitiated, compounding refers to the capacity of your invested amount to grow and accrue interest/earnings not only on the principal amount but also on the previously accrued interest. The power of compounding is magnified as time passes. That is why experts suggest investing in a ULIP policy as early as possible. The returns you receive on your investment lead to a higher return with each year as the reinvested amount increases. 

You can make partial withdrawals sooner 

ULIPs have a lock-in period of five years during which the insurer may not permit you to withdraw the returns. This lock-in period is aimed to make the investment accrue better returns over a longer period without any intervention of withdrawals. If you invest in a ULIP policy early on in your life, when you may not have as many dependents on you, you can soar through the lock-in period easily. After a few years, as the lock-in period ends, you can make partial withdrawals to meet your growing financial responsibilities. 

Your tax-savings increases considerably 

There are a multitude of ULIP tax benefits that you can enjoy even more if you invest early. While Section 80C allows for tax deductions against the premium of your term policy, Section 10 (10D) allows for tax exemptions on death benefit pay-out, surrender value pay-out, and maturity benefits, subject to changes in tax laws. 

You would be glad to know that even the partial withdrawals you make after the completion of the lock-in period are tax exempted. If you have recently started earning, then you should have a long-term tax-saving strategy sorted out. Investing in a ULIP can be an essential element of such a strategy. The sooner you invest in a policy, the higher the ULIP tax benefits you will enjoy. 

Another benefit to be gained by investing in ULIPs is the early formation of good financial habits. This helps one realise the importance of saving and investing the right way and in the right manner, with ULIPs. Do consult a financial expert before going ahead with a ULIP plan as its performance is subjected to market volatility.