Whether you have set goals for your personal growth or for the betterment of your loved ones, planning your finances the right way is the first step in achieving those goals. Experts also suggest starting your financial planning and investing in the right instruments as early as possible. Opting for products that merge two financial aims into one can be a wise choice if done in the right manner. A product such as a ULIP can help you fulfil multiple goals due to the various benefits they offer. Let us see how.
What is a ULIP and how does it work?
A ULIP is an insurance product that also has an investment component attached to it. ULIP premiums are used to build your life cover and to invest in the financial instruments that suit your needs. Insurance companies have fund managers that allocate your investment amount into the right kind of funds to maximise the returns you can receive. One can choose between equity funds, debt funds, and hybrid funds as per their risk appetite.
There is a certain strategy you need to keep in mind if you are planning to fulfil your life goals with a single ULIP plan.
How to achieve life goals with a single ULIP
- Distinguish between short-term and long-term goals
As an investor looking to create wealth, you may have some short-term goals as well as long-term goals. Short-term goals may include buying a car, a house, a foreign trip, and the likes. Long-term goals may include saving for children’s higher education, retirement planning, and so on. When you buy a ULIP, you need to keep both these goal types in mind.
Ideally, long-term goals such as retirement should be given priority, as they are difficult to compromise on.
- Understand the cost and duration of each goal
Let’s assume one of your short-term goals is to buy a car in the next 7 years. You have set another goal,which is a foreign trip, in the next 5 years. And the most important goal, which is retirement, is around 25-30 years away. Now, you need to understand the cost of each goal here. So, a foreign trip might cost Rs 1-2 lakhs, while the down payment for a car loan could cost Rs 5-6 lakhs.
You need to invest in your ULIP plan such that you get to withdraw returns and reap ULIP benefits at the right time to meet your short-term goals. At the same time, the fund should have enough money to sustain it to reach your next goal and ultimately, create an awesome corpus by the time you retire.
- Set a budget and strategy for your investment
Now that you have understood the costs of your goals, you have to create a budget outlining how much you can invest within a period. You can also optimise the amount you invest by switching between equity funds and debt funds. When the market performance is on a steady rise, you can adjust in your funds to maximise the market incline. Similarly, debt funds can be opted when interest rates are increasing. Such strategies help you maximise your ULIP benefits.
- Optimise your life insurance cover
ULIP offers not just a way to create wealth but also a way to insure your life and other aspects. For many, protection of money from sudden, unfortunate events is also a significant financial objective. Therefore, one should opt for riders such as critical illness insurance rider or an accidental permanent disability rider, that provide a financial lump sum amount when the policyholder suffers a critical illness or undergoes a permanent disability, respectively.
What about tax-saving goals?
If you have some goals related to saving tax, Section 80C can come to your aid, thanks to the extensive ULIP tax benefits. As per Section 80C of the Income Tax Act, the premiums of your ULIP plan are eligible for tax deductions of up to Rs 1.5 lakhs. Alongside, the maturity pay-out, the death benefit pay-out, and the surrender value, the partial withdrawals are tax-exempted too, given that all conditions are met.
Before you go ahead with a ULIP, remember to reach out to a financial consultant and read the terms and conditions. It is also important to remember that ULIP tax benefits are subject to change in tax laws.