While planning for retirement, ULIPs can best suit those investors who are looking for long-term wealth creation. It is a type of life insurance plan which offers dual benefits of insurance & investments, where a portion is invested in the funds opted for, & the rest is allocated towards life insurance coverage.
Whether they can be considered as the Best Savings Plan for retirement purposes or not will depend on the risk tolerance level, financial objectives, & investment horizon. Retirement plans help provide financial support during your post-retirement period, enabling you to meet your post-retirement goals. ULIPs can be a great choice for senior citizens as they offer insurance with investments.
How Do ULIPs Work?
Let us understand the basic working of a ULIP plan:
- The policyholder will pay the premium amount towards the life insurance plan, which will be invested in market-linked instruments.
- The policyholder is provided with an option to choose the type of funds depending on the risk profile, i.e. debt, equity, or balanced.
- Once the amount is invested, the corpus amount is then converted into units bearing a face value, which is known as Net Asset Value (NAV).
- Whenever the premium is paid, the number of units gets accumulated in the plan.
- This plan has a lock-in period of 5 years after which only partial withdrawal of fund is allowed or paid out at the time of maturity.
- The number of units sold depends on the prevailing net asset value when the funds are withdrawn either partially or completely.
- In case the policyholder dies, the nominees will receive either the accumulated corpus funds or 105% of the premium amount paid, whichever is higher.
- Under this plan, the funds are invested in multiple securities, such as stocks, bonds, or both, the ratio of which depends on the financial objective & risk appetite of the policyholder.
Should ULIPs be chosen for Retirement?
Provided are the reasons why a ULIP Plan should be chosen for retirement:
- Power of Compounding
One should start saving & making investments as soon as they start earning. & if an investor opts for a ULIP plan, they will enjoy the benefit of compounding, which means interest on interest. Hence, if ULIPs are bought early & the investor remains invested, it will offer better returns due to the power of compounding.
- Long-Term Investments
While investing in market-linked plans, an investor should prefer long-term investment plans, which help balance the market fluctuations. Under ULIPs, an investor has to remain invested for a mandatory lock-in of 5 years, providing coverage of up to 75 years of age.
- Risk-Based Investing
This plan allows investors to invest funds depending on their risk profiles. ULIPs offer three types of funds depending on the risk profile, i.e. equity funds for risk takers, debt funds for risk-averse individuals, & balanced funds for medium-risk investors.
- Fund Switching
ULIPs allow you to switch between the funds depending on your risk tolerance level or current market scenario. This means an investor, during their early age, can allocate their funds in high-risk investments & can switch to less risky investments later on when close to their retirement.
- Tax Benefits
This plan allows a deduction of tax on the premium amount paid u/s 80C of the Income Tax Act, 1961. Additionally, the maturity benefits received are exempt from tax u/s 10(10D) of the Income Tax Act, 1961 if the total premium amount does not exceed INR 2.5 lakhs during the previous year. In case the premium amount is more than INR 2.5 lakhs, the maturity benefits would be taxed as capital gains.
Factors to be considered when choosing ULIP Retirement Plans
- Start Early
It is suggested to start investing as early as possible to take advantage of the power of compounding, helping to build a strong financial base for senior citizens.
- Compare Multiple Plans
Assess the different options available for investments, fund management charges, historic performances, mortality costs, etc.
- Review Annually
One should review their plan periodically, as with ageing, financial situation, risk tolerance level, everything changes.
Types of ULIPs offered for Retirement Planning
ULIPs are offered in different forms depending on the investor’s financial needs & objectives, including premium paying capacity, risk-return profile, etc. Let us understand the different types of ULIPs available for retirement planning.
- Single Premium
Under a single premium ULIP, the policyholder is required to make a single payment in a lump sum towards the plan. This type of ULIP can be opted for if a policyholder has some surplus funds in h& & wants to avoid the fuss of paying monthly premiums.
- Endowment Plan
This type offers the combined benefit of life insurance & a savings plan, making it best suitable for retirement purposes. Under this type of ULIP, the policyholder also receives the maturity benefits, wherein the policyholder receives the accumulated funds along with a bonus if the policyholder survives the plan.
- Annuity Plan
These types of ULIPs offer a regular stream of income throughout the retirement tenure. Under this plan, the policyholder is required to invest the funds either in instalments or in a lump sum. After which, the insurance company releases a payout amount, either variable or fixed, for a fixed period or for a lifetime.
- Pure Pension Plans
These plans help to accumulate funds to meet the post-retirement needs. This plan offers flexibility to select different premium payment options or investment preferences according to your risk tolerance level & retirement objectives.
- Sum Assured
In case of an unfortunate demise of the policyholder during the tenure, the sum assured amount would be received by the nominees. This ensures the financial safety of the family members by fulfilling their future needs.
Conclusion
Whether you opt for a pension plan or ULIP, or both, retirement planning is crucial for effective financial planning. Assess the financial needs with the help of a calculator, & calculate the amount of corpus funds needed. Additionally, an investor can seek the financial advisor which type of plan suits the investor the most. This will depend on the risk tolerance level & investment horizon.
