Why It Is Necessary to Invest in ULIP for the Long Term
Are you looking to invest in a financial instrument that provides stable returns while assuring you a host of benefits? A ULIP plan can be the right option for you. A ULIP is a unique and innovative financial product offered by several insurance companies. It is majorly a life insurance product that also includes the option for the policyholder to invest in market instruments. As compared to other investment products as well, a ULIP can prove to be very beneficial. As with any other investment option, the benefits of a ULIP policy are best enjoyed if the money is kept invested for a long period. The longer your funds stay in the market, the better they perform. Why is this so and how can you ensure a long-term ULIP investment? Here are explanations for the same.
Understanding ULIPs as an insurance + investment product
Your ULIP premium is divided and used for life insurance coverage, and to invest in financial instruments. The life insurance coverage portion can prove to be immensely helpful to your loved ones in the event of the policyholder passing away. The investment portion is parked in the instruments of your choice, such as fixed deposits, government bonds, and private bonds if you have opted for a conservative portfolio. Stocks and shares are considered if you have opted for an aggressive portfolio.
As these funds undergo market fluctuations, the returns on your ULIP plans also accumulate gradually.
Why keep ULIPs investment in the long term
The compounding effect
Perhaps no other concept makes a long-term investment such an appealing option as compounding does. For the unaware, compounding refers to the process of the interest being earned on not only the principal amount but also on the interest previously gained on the principal amount.
For instance, let’s assume you have invested Rs 50,000 and are earning interest at the rate of 7%. For the first year, the interest will be calculated considering the amount of Rs 50,000 and the interest will be Rs 3,500. The next year, the interest will not be calculated on the initial principal amount (Rs 50,000), but rather on the renewed total amount, which is Rs 53,500.
In a ULIP scenario, compounding can bring in considerable results, especially if it continues to occur for an extended number of years.
A mandatory lock-in period of five years
ULIPs have a mandatory lock-in period of five years. Within these five years, the policyholder cannot withdraw funds at all. If you want to surrender your policy during this period, you will incur ULIP surrender charges. The purpose of this lock-in period is to ensure that your funds continue to perform well for a constant duration without going through any external intervention. A duration of five years is also perfect to instil a habit of regular investment.
If you are looking to gain even more returns, then it is advisable to keep your money parked for a decade or longer, even though there are no ULIP surrender charges after the end of the lock-in period.
Achievable long-term financial objectives
When you invest in your ULIPs for a long period, it becomes easier to achieve your long-term financial goals. ULIPs are designed for a long-term approach. If one were to withdraw all the funds as soon as the lock-in period is over, the chances of accumulating even more returns reduces.
As you grow older, the kind of goals that you have also undergo a change. As a householder, you may want to fund your children’s higher education, go on a foreign trip, etc. These goals are possible with the high returns from ULIP plans given that they are kept for a sustained period of time.
Life insurance coverage
It is important to remember that your ULIP also offers life insurance coverage. If you surrender the policy, you let go of the benefits that come with this coverage. In the absence of life insurance, your loved ones are left with no financial backup if anything were to happen to you. In these times of uncertainties and inflation, such a situation can prove to be very unfortunate for you. Therefore, it is recommended that you continue your ULIP policy for as long as you can.
Do read the terms and conditions of your policy before investing. Also, reach out to a financial expert to curate a ULIP strategy that benefits you highly in the long run.