Traditionally, after retirement, most couples moved in with their children. The retired individual led a very simple life, with no major expenditure. As a result, the financial requirements for a post-retirement life were minimal.
Today, even after retirement, individuals like to enjoy their lives and continue the same standard of living. Retirement is known as a second innings of life, and rightfully so! People rediscover hobbies, some start a small business. Some take this time to explore the world by travelling to new places.
Additionally, more and more professionals are looking to retire early. They work till 45-50 years of age and then retire to a quiet and peaceful life, away from the hustle and stress of professional life.
This change in the idea of and need for a new post-retirement life has given impetus to dedicated financial planning for retirement. Professionals in their 20s are looking for attractive retirement planning avenues to help them earn good returns, build a sizeable retirement corpus and enjoy a financially independent post-retirement life.
As people are starting early, they are willing to opt for high-risk avenues to get a chance to earn well. One product that offers not only risk-equivalent market-based earnings but also life cover is ULIP insurance or a Unit Linked Insurance Plan.
In this article, we will discuss if ULIPs are a smart choice for retirement planning.
What are ULIPs and How do ULIP Plans Work?
Let’s start with the basics. Unit Linked Insurance Plans are a type of life insurance that offers the dual benefits of life cover and market-linked returns. A portion of the premium you pay towards a ULIP policy is invested in market-linked avenues. The ULIP returns you earn are dependent on how your funds performed.
Let’s see how ULIP plans work:
- As with all life insurance plans, you pay a premium to buy a ULIP. The premiums paid by all ULIP policyholders are pooled and invested in the market-linked funds by the insurance company.
- The policyholder can choose a fund - equity, debt or balanced - based on their risk profile.
- After the money is invested, the corpus is divided into individual ‘units’ which bear a specific face value. You will get a certain number of units based on the amount invested for your ULIP. This value of each unit is called an NAV (Net Asset Value) which changes as per prevailing market conditions (just like the stock market).
- Every time you pay the premium, a corresponding number of units are added to your policy.
- ULIP policies have a 5-year lock-in period. The accumulated corpus can be withdrawn either partially after the 5-year lock-in or is paid out on maturity.
- When you completely or partially withdraw from your ULIP, the specific number of units is sold based on the prevailing NAV.
- In case of your unfortunate demise during the policy term, the appointed beneficiary will get either 105% of the premiums paid to date or the accumulated fund value (after deducting any withdrawals) whichever is higher.
Is it Smart to Choose ULIP Plan for Retirement Planning?
One word answer - YES!
ULIPs are a great avenue for retirement planning. Let us understand why.
Power of Compounding
It is advisable to start your retirement planning and investment from the moment you start earning. When you invest in a ULIP, the compounding effect applies. As a result, if you buy a ULIP early, you ensure adequate time for your money to compound and thus, earn ULIP returns on your investment.
When you invest in market-linked avenues, it is advisable to invest for the long term to balance out the vagaries of the market forces and earn good returns. While ULIPs have a lock-in period of 5 years, insurers offer ULIP coverage for up to 75 years of age. So, if you buy a policy at the age of 30, you get a policy tenure of 45 years! This allows for a long-term investment with better ULIP returns.
At Tata AIA, we offer loyalty additions with our ULIP insurance. If you continue your ULIP policy with us for more than 11 years, we add additional units equivalent to 0.20% of the existing units every policy anniversary. This feature allows you to enjoy added benefits of long-term investments.
As already discussed, ULIPs allow you to invest in funds as per your risk profile. There are three types of funds based on risk profile - Equity funds for high-risk investments, debt funds for low-risk investments and hybrid/balanced funds for medium-risk investments. The higher the risk, the higher the returns.
With Tata AIA Life ULIP plans, you get a choice of 11 different fund options to invest in based on your unique risk profile.
You can switch the funds multiple times during your policy tenure to match your risk appetite during different stages of your life or based on the prevailing market conditions.
When you start investing early, you can afford to invest in high-risk funds. As you move towards your retirement age, bring down the proportion of high-risk investments. You can opt for balanced funds. Once you reach your 50s, the majority proportion of your investments should be in debt funds.
ULIP insurance offers attractive tax* benefits on the premiums paid as well as the maturity benefits as per prevailing rules under the Income Tax Act of 1961.
The premiums paid are tax-deductible* under Section 80C of the Act. When it comes to the maturity benefits, Budget 2021 made significant changes to the taxability* of ULIP maturity payouts.
As per the revised rules, under Section 10(10D) of the Act, maturity benefits are completely exempt from taxation* if the total premiums paid for ULIPs (1 or more) in a fiscal year are below ₹2.5 Lakh. If the premiums exceed ₹2.5 Lakh the maturity payouts are taxed* as capital gains.
All these factors make it smart to choose a ULIP plan for retirement planning. Additionally, senior citizens with regular income in their post-retirement years can continue with ULIP investments. They can opt for low-risk debt investments and continue growing their wealth. This way they can leave behind a sizable financial legacy for their children and grandchildren.
Also, if you are looking for a 360-degree holistic and combo life insurance solution then you can opt for ILPs(investment-linked policies) from Tata AIA. The Param Rakshak Solution and Param Rakshak Plus Solution are holistic plans that cover all your protection and wealth needs. The Param Rakshak plan comprises Tata AIA Life Insurance Smart Sampoorna Raksha plan(Unit-linked, Non-participating, Individual Life Insurance Plan for Savings and Protection, UIN: 110L156V02) and Tata AIA Life Insurance-Linked Comprehensive Protection Rider1(A Non-Linked, Non- Participating Individual Health rider, UIN: 110A032V02).
While the Param Rakshak Plus combines the benefits of the Tata AIA Life Insurance Smart Sampoorna Raksha plan(Unit-linked, Non-participating, Individual Life Insurance Plan for Savings and Protection, UIN: 110L156V02), Tata AIA Life Insurance-Linked Comprehensive Protection Rider(A Non-Linked, Non- Participating Individual Health rider, UIN: 110A032V02), and Tata AIA Life Insurance-Linked Comprehensive Health Rider(A Non-Linked, Non- Participating Individual Health rider, UIN: 110A031V02) under one single plan.
So, what are you waiting for? Start investing in a Unit Linked Insurance Plan today to earn market-linked ULIP returns, risk-based investing, tax benefits and life cover.
In case of any doubts, get in touch with our experts who will help you find the perfect ULIP for your needs.