Do ULIPs Offer Protection From Inflation?
Published On Jun 03, 2021 5:51 PM By InsuranceDekho
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Each year, one unit of any currency is able to buy fewer and fewer things due to the sole reason i.e inflation. According to this statement, supposedly, your INR 100 note will only be worth INR 95 a year from now if inflation is 5% , effectively reducing your purchasing power and value of your income. However, ULIPs do not ignore the inflation, rather they provide protection from it in the below mentioned ways.
Ways In Which ULIPs Keep You Shielded Against Inflation
ULIP help you keep your hard-earned money protected against inflation with the help of the following -
1. Market-linked Returns
One of the biggest drawbacks of an ULIP plan is that it provides market-linked, inflation-adjusted returns because it gives you the option to invest in equities with relatively lower risk. As discussed, equities tend to generate higher returns than any other asset class i.e debt or balanced over the longer term and also beat inflation, which makes ULIPs an stable investment opportunity. Also, because it provides flexibility to its investors in every way possible, ULIPs allows you to mix and match your assets according to your needs, choose your investment portfolio, and hedge against the market risks and volatility of the market.
2. Longer Lock-in Period
As an investment and insurance product, the ULIP can be customised for goal-based planning. The purpose of allocating your hard-earned money in an ULIP is for the achievement of specific mid- to long-term goals such as buying a house, starting a family, marriage of your child, or retiring, etc. That is the reason why ULIP plans are designed to be truly fruitful if you invest for a minimum of 10 years, and also they have a lock-in of 5 years, which allows you to systematically invest to gradually maximise your wealth for specific life and financial goals. Moreover, ULIPs encourage the policyholder discipline and help develop long-term investment habits with the power of compounding. If you opt for equity related funds, a longer period is required to yield maximum returns.
3. Tax Benefits
You are also entitled to enjoy tax benefits associated with ULIPs along with your investment and life cover. If you invest in a ULIP, you can claim up to INR 1.5 Lakh in your annual tax return under the Section 80C of the Income Tax Act, 1961. Tax benefits provided via ULIPs can help the investor to minimize the impact of gradually rising prices. In ULIPs you also get tax-free withdrawals. Through its insurance aspect, you can also ensure the financial safety of your loved ones even in your absence.
Inflation is an inevitable part of an economy, it cannot completely vanish. As an individual, we can make sure we cope with the inflation by taking required steps. Purchasing an ULIP provides protection against inflation upto an extent via its various benefits listed above. While making an investment decision, one must take notice of all the factors rather than just focussing on high returns.