In the last few years, especially after the COVID-19 pandemic, there has been a renewed interest in the life insurance sector. Faced with high levels of uncertainty, people have been looking to secure their loved ones’ future in case anything unfortunate were to happen to them. The general population’s knowledge of market performance has increased too. This has led particularly to the popularity of insurance plans that offer investment opportunities with market-linked returns . ULIP is one insurance plan that offers investment opportunities and has a lock-in period of five years. A policyholder can make the most of this feature by opting for the SWP (Systematic Withdrawal Plan).
What is a ULIP?
Let us first understand how a ULIP works in general. The insurance company uses half of the premiums of its ULIP policyholders to invest in market-related financial instruments in large amounts. The policyholder is allocated units as per their share of the total amount invested. They receive returns based on how the units allotted to them are performing.
One can get estimated figures of their investment returns with the help of a ULIP plan calculator.
The amount invested by the insurer is just half of the premium. The other half is used as insurance cover, which helps create the sum assured. This life cover is duly provided to the chosen loved ones if the policyholder passes away under unfortunate circumstances when the policy is active.
Understanding the Systematic Withdrawal Plan
As mentioned earlier, a ULIP has a lock-in period of five years usually. Within this period, the policyholder cannot make any withdrawals on their money without attracting specific charges. However, once the lock-in period is completed, withdrawals can be made by the policyholder. The terms and conditions on withdrawing ULIP returns differ from insurer to insurer. The Systematic Withdrawal Plan is an effective way to organise these withdrawals to bring you maximum benefits. Here’s a look at some features and benefits of the SWP:
Provides a fixed amount at regular intervals
When you choose a SWP, you receive a fixed amount at regular intervals. The period between the withdrawals can be set by you. This income can help you during cash crises and can ensure that your daily expenses continue to run smoothly.
Encourages financial discipline
A ULIP plan with an SWP feature allows you to be more disciplined with your finances. Since the money you receive is fixed and at regular intervals, you are less tempted to withdraw your returns when the market is on its way to a low or you may want to invest a large amount during a market high. However, market volatility is unpredictable. Rather than investing and withdrawing frequently, as per the ups and downs of the market, experts suggest that it is better to have regular investments and withdrawals. This is exactly what an SWP offers, a shield from market fluctuations.
Helps achieve financial goals
Receiving a fixed income frequently can help you meet certain financial goals that may be outside of your regular income and your budget. It may be the tuition fees of a high-standard educational institute that your child wants to get admitted to, or it may be a foreign tour that you are planning with your spouse. You can use a ULIP plan calculator to get an estimate of the returns and thus invest accordingly for your goals.
Brings in tax benefits
Withdrawals made on a ULIP plan are exempted from tax deducted at source (TDS) as per prevailing tax laws. So, the tax is levied only on the income aspect and not on the capital aspect of the withdrawal. Investors can make the most of this by opting only for the appreciation on the investment amount rather than the investment itself. This ensures that your money keeps growing while you enjoy regular withdrawals and tax-saving.
Besides these features, one should always keep in mind that life insurance is an important element of one’s financial portfolio. While receiving returns is well and good, one should always pay premiums on time to secure their loved ones’ future. Ensure you read the terms and conditions for withdrawing ULIP returns before signing up for a plan.
