Planning for retirement is a crucial aspect of one’s financial journey, and selecting the right investment instruments to build a solid retirement portfolio is no easy task. Amongst the various options available, Unit Linked Insurance Plans (ULIPs) have gained significant popularity in recent years.
ULIPs offer the dual benefit of insurance coverage and investment opportunities, making them an intriguing proposition for retirees. It gives you the flexibility to invest in high-risk equity funds that offer higher returns, low-risk debt funds or a combination of both, based on your risk appetite.
In this article, we will delve into the subject and provide insights to help you make an informed decision regarding the inclusion of ULIPs in your retirement planning.
One of the key reasons why ULIPs should be a part of your retirement portfolio is their potential for long-term wealth creation. ULIPs offer individuals the opportunity to invest in equity funds that have historically delivered higher returns than traditional fixed income instruments. By staying invested in ULIPs for a longer duration, individuals can benefit from the power of compounding and generate substantial wealth over time.
ULIPs also offer attractive tax benefits, making them a valuable addition to any retirement portfolio. Under Section 80C of the Income Tax Act, individuals can avail of tax deductions for the premiums paid towards ULIPs, up to a maximum limit of Rs. 1.5 lakh per annum. Additionally, the maturity proceeds from ULIPs are tax-free under Section 10(10D) of the Income Tax Act, making them a tax-efficient investment option.
“The cost of mortality is higher for older individuals, making ULIPs unfit for pre-retirement portfolios. The monthly debit of units to cover mortality costs can eat into one’s accumulated units over time,” says Shailesh Kumar, Co-Founder and Insurance Head, Insurance Samadhan.
For example, a 60-year-old paying Rs. 1000 each month for a Rs. 10 lakh cover would pay a higher cost than a 40-year-old who is paying Rs. 150 every month. Even market fluctuations can affect one’s units, with favourable market conditions debiting fewer units and downturns eroding more units. For instance, when the NAV is Rs. 50, only 200 units will be debited compared to the 250 units debited when the NAV plunges to Rs. 40.
Another advantage of ULIPs is the flexibility and control they offer. Unlike traditional insurance policies, ULIPs allow individuals to switch between different funds based on market conditions and their risk appetite. As individuals approach retirement, they can gradually shift their investments from equity funds to debt funds to reduce the risk and preserve the accumulated corpus.
Rakesh Goyal, Director, Probus Insurance broker says, “ULIPs can be a part of your retirement portfolio if you have a long investment horizon of 15-20 years. Investing Rs. 10,000 annually for 15 years at an assumed return of 8% inflation proof can grow your money to around Rs. 2.5 lakhs. However, one must understand the product risks and charges involved to avoid confusion later.”
ULIPs not only provide investment benefits but also offer life insurance coverage. This is particularly beneficial for those individuals who may not have separate life insurance coverage. The life cover provided by ULIPs ensures that in the unfortunate event of the policyholder’s demise, their family will receive a lump sum amount to meet their financial needs and maintain their standard of living.
“As per historic performance of the last 10 years, an individual can gain 11-20% annual returns for an investment in the ULIP. It is a market linked product with great potential to build a corpus for one’s retirement if they’re willing to take some risks. The product can be a great addition and is better suited for early retirement planners and young individuals,” says Nitin Mehta, Chief Customer Officer & Head – Marketing, Digital & Online Sales, Bharti AXA Life Insurance.
However, it is important to carefully understand the terms and conditions, charges, and potential risks associated with ULIPs before investing. Consulting with a financial advisor can help you determine if ULIPs are suitable for your retirement goals and risk appetite.
Ultimately, a well-structured retirement portfolio should consist of a mix of different investment options, and ULIPs can be a valuable addition to the overall strategy.
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Updated: 30 Nov 2023, 09:36 AM IST