The importance of investing is doubled during a time of uncertainty. As things become unpredictable, many people crave financial stability. Even though the worst of the COVID-19 pandemic seems to have gone, some ill effects still stay. One of the negative consequences of the pandemic is the financial problems it can bring to an individual’s life. In such a situation, one must be prepared with apt financial planning. A ULIP policy, with its dual offerings of life insurance and market-linked investment returns, can be the right choice to manage your wealth during the pandemic. Let’s learn more about this below.
How does a ULIP work?
To understand how a ULIP helps financially during the pandemic, one must first understand how it works in general. Unlike with other life insurance policies, the premium of a ULIP policy is not used solely to create the life cover corpus. A large portion of the premium is also used to invest in financial instruments of your choice.
This portion is pooled together along with the money from other investors. You are allotted a number of units depending on your share of the pooled amount. Hence, the name, Unit-Linked Insurance Plan. The performance of the funds determines the returns you receive. A ULIP plan calculator helps you get an estimate of the returns based on several variables, such as tenure and amount, amongst others.
How ULIPs can help during COVID-19
Provides financial security against unfortunate events
The biggest certainty one requires during the pandemic is the assurance that if anything were to happen to them, their family members will be taken care of. With a ULIP policy, one has this assurance. The life cover provided by the ULIP policy ensures that if the policyholder passes away due to the virus or other covered reasons, the family gets the sum assured amount. This amount can help them tide over the financial difficulties that can occur in the absence of the earning member of the family.
Not only that, but the amount also ensures that there are enough funds to take care of the family members if they happen to get infected. Thus, the importance of a ULIP policy during the COVID-19 pandemic cannot be underestimated.
Allows for fund switching
As has been observed for the last two years, a sustained pandemic can lead to increased market volatility. The market has seen some very severe ups and downs during the pandemic. For an investor, especially one who is risk-averse, this can become a cause of worry. If you have invested in a scheme that deals exclusively in equity, there are chances of losses. A ULIP policy can help you avoid this.
ULIPs allow the policyholder to switch their funds from equity to debt and vice versa depending on their needs. So, let’s say, you have invested 75% of your funds into equity and 25% into debt instruments. But the markets have been showing signs of reaching a record low. In this scenario, you can simply reach out to your insurer and get your 75% equity fund transferred to debt funds. Once the markets are back to normal, you can gradually switch the funds back to equity.
Allows for tax-free partial withdrawals
Concerned about the taxation on your investment returns? With a ULIP plan, you do not have to. As per prevalent tax laws, the returns on your ULIPs are not taxed as long as certain conditions are met. To enjoy these tax-free returns in an organised manner, one can also create a systematic withdrawal plan. The importance of this ULIP benefit during COVID-19 pandemic times is that you keep getting a certain amount of money at regular intervals. In the event of a job loss or a medical emergency during the pandemic, this feature can prove to be very helpful.
Things to remember before you invest in a ULIP
Planning to invest in a ULIP to deal with the pandemic? Here are a few things to remember before going ahead with the same.
- Opt for add-ons – Riders, such as accidental permanent disability and waiver of premium, can help you when unfortunate situations strike in a different manner.
- Remember that ULIPs have a 5-year lock-in period – Within this lock-in period, you cannot make withdrawals on your investment. Hence, it is better to invest as early as possible.
- Tax benefits may change – Depending on amendments in tax laws, current tax benefits may not be applicable in the future. These benefits are also subject to terms and conditions. It is best to consult a financial expert before taking a major step.