ULIP plans are hybrid life insurance policies that combine insurance and investment, i.e. you get life coverage and returns on market-linked investments. The premiums you pay are invested in market-linked financial instruments after deducting all applicable charges. ULIPs offer you the flexibility to choose from liquid, equity, debt or balanced funds and allow you to switch between them freely to adjust for any market fluctuations. But a key question arises: How long should you invest in your ULIP plan? Experts usually recommend a long-term strategy when dealing with ULIPs, which typically give better returns over longer durations. Here is a guide towards staying invested in these investments for the long haul, along with a few other vital aspects.
ULIPs and long-term investments
While you can always use a ULIP calculator to work out your expected returns over any particular tenure, two basic investment principles apply to these plans if you wish to create a sizeable corpus. Firstly, you should always remain invested for the long haul and aim to make your investment portfolio as diverse as possible. Like all investment avenues, time plays a crucial role in determining your returns, as ULIPs can leverage the power of compounding to the fullest in the long run. Compounding happens when your returns from an investment are reinvested to generate further returns.
For example, let’s say you invest Rs. 1.5 lacs annually into a ULIP plan for 10 years. You split your investment equally between debt and equity, with 5% and 8% rates of return, respectively. Then, at the end of 10 years, you will have a corpus of Rs. 20 lacs. The same investment will turn into a corpus of Rs. 36 Lacs if you stay invested for 15 years and Rs. 57 lacs if you stay invested for 20 years! Thus, compounding can result in exponential gains in the long run.
Why stay invested for the long term in ULIPs?
In addition to the benefits of compounding, ULIPs offer some additional benefits that may compel you to stay invested for more extended periods.
1. Lock-In Periods
ULIP plans come with five-year lock-in periods, which ensures that you build investment discipline and get used to long-term investments. It can prepare you for the long haul, and staying invested with this discipline for 15-20 years will help you maximize all the benefits of long-term investments, from the power of compounding, long-term tax benefits and the minimization of market risks. . Also, ULIPs come with partial withdrawal facilities after this lock-in period is over.
2. Flexible Choices
Staying invested in ULIPs for the long term is always beneficial since you can always switch your funds to minimize market risks and top-up your premiums to maximize investment amounts. You can also diversify your investments based on your appetite for risk and changing life stages and milestones. You may select from debt, equity, hybrid, and other funds and keep switching as per the market conditions. Top-ups help you add more funds (in addition to the premiums) for growing your investment. You can thus manage your investment better in the long run since your financial goals and other needs may evolve with time. You can readily readjust between equity and debt funds depending on your stage of life and changing risk tolerance.
3. Tax Deductions
You can get tax benefits per the Income Tax Act of 1961. These apply to the premiums paid (up to Rs. 1.5 lakh) as per Section 80 (80C), while Section 10 (10D) of the Income Tax Act offers exemptions on the maturity amount as well. As per the latest Tax regime, the total premiums for a ULIP (or all your ULIPs) bought on or before February 1st, 2021, must not exceed Rs. 2.5 lacs annually for the maturity benefits to remain tax-free. If they exceed this limit, they shall be taxable as Capital Gains.
4. Cost Averaging
While you pay most costs at the beginning, you will find the cost spread averaging out throughout the entire duration after the lock-in period. The longer you stay invested, the lower your cost per unit will ultimately be.
5. Partial withdrawal tax benefits
If you have to withdraw money from your ULIP to take care of any emergency or urgent requirement, you will get tax exemptions on it under Section 10(10D) of the Income Tax Act, 1961. This applies if the partial withdrawal does not surpass 20% of the fund’s value.
6. Equity trends
Equity funds are chosen by most investors while choosing funds to invest in during the time of starting ULIPs. The reason is that equity offers the chance of earning higher returns, although the risks are also considerably higher. Yet, despite interim market volatility and fluctuations, equity always tends to do better in the long term. Hence, staying invested for several years will help you tide through temporary market cycles and ultimately reap the rewards of your investment.
How long should you stay invested?
There is no hard and fast rule as to the duration of your ULIP investment. However, as mentioned before, you should aim for 10 to 15 years at least. This will give your money time to grow through the power of compounding. At the same time, the long investment horizon will balance your costs (averaging) and help you tide over initial market fluctuations and shifts. Of course, you can always be hands-on with your fund-switching strategies to maximize your returns and rebalance portfolios as per changing market conditions. However, it requires patience and discipline on your part, especially once the 5-year lock-in period is completed. Another incentive to stay invested for the long haul is, of course, the life insurance coverage that you get.
Hence, be in it for the long haul and remain patient. You will surely reap the benefits of your investment in a ULIP.
