Millennials may not feel the urgency to get life insurance and might postpone its purchase. This is because most young people do not have any liabilities or dependents. Also, in the early years, the pay is usually low, and they might prioritise investing over getting insurance. If you are a millennial looking for an investment option, Unit Linked Insurance Plan (ULIP) is one plan that offers you both life insurance and an investment opportunity.
Understanding ULIP
ULIPs is a life insurance policy that comes with an investment avenue. Like any insurance, you have to premiums for your ULIP, but they are used differently here, in comparison to a conventional life policy. The premiums that you pay are partially used towards providing you with a life cover and partially invested in funds of your choice. Depending upon your risk ability, you can invest in different ULIP funds. They are broadly categorised into three types: Equity-based, debt-based, and balanced funds.
Conducting comprehensive research is needed before buying any instrument. If you are buying a ULIP, it is important that you use a ULIP calculator to know your needs and cost, along with comparing several plans online. The calculator helps you to plan your investment and life cover simultaneously. By entering your data, like the type of fund, premium amount, tenure, and rate of returns, you will get an estimate of your ULIP’s performance.
ULIP: A perfect investment for millennials
Investing and savings are those components of personal finance where the earlier you start, the more likely you are to benefit. Buying a ULIP in your 20s is expected to provide way better results than buying one in your 40s. Here is why ULIPs are an intelligent investment for millennials:
Rewards for the high-risk appetite
Younger investors usually have a high-risk appetite compared to the older generations who may have dependents and liabilities to take care of. This allows them to take a risk with their investment and earn high rewards for those risks. ULIPs broadly offer three funds based on your risk-bearing capabilities. Equity-based ULIPs have a high risk involved, as the funds are directly invested in equity markets. Millennials can invest in them and earn high returns for the high risk that they are taking. In the long haul, the data of the past years reflect that equities have outperformed other asset classes.
Enables wealth generation
Investing early allows a policyholder to build a substantial corpus over the years. Since ULIP is designed for the long-term, it generates a substantial amount of wealth for your future. The longer you invest in, the more your returns compound and multiply your profit. When your ULIP matures, these funds help you meet your long-term goals. Also, since your investment will surpass the tenure of 12 months in a ULIP, its returns will be treated as long term capital gains for tax purposes.
The benefit of compounding
Compounding is when you get returns on your principal amount and your internet amount. This is because over the years, in your investment, the interest you earn is added to the principal amount. For example, assume that you have an investment of Rs.100 and have received 20% interest. With compounding, your principal amount now becomes Rs.120. Now, the next year, you earn 20% interest, this will be calculated on the new principal of Rs.120 and your return will increase further to Rs 24. You can use a ULIP calculator to get an estimate of your returns over the years. With a recurring investment like a ULIP, this cycle continues till your investment matures. Investing at a young age allows you to gain benefits from compounding and multiplies your wealth.
Enables the habit of saving
At a young age, it is tempting to splurge your paycheck while saving no money on the side. Investing in a ULIP ensures that you save funds with discipline, as they come with a lock-in period. The lock-in period of a ULIP is 5 years. Within this period, you cannot withdraw any funds from your plan. Also, the recurring premiums you pay for your plan enable you to invest regularly.
The earlier you invest, the more you can benefit from it over the long haul. Investing early provides a pool of funds that you can access to meet your long-term goals. Before investing in any financial instrument, ensure that you read the fine print to avoid any problems later.
