Everyone desires to shield their families and multiply their income through sacrifice. Nevertheless, when you consider the best savings plan in India, one might easily get caught up in a maze of options. Two terms, in fact, will come your way most of the time: a ULIP plan and a traditional savings plan.
Both of these choices equip you with life insurance cover. Hence, your family is assured of a fixed amount of money if something untoward happens to you. However, the manner in which your money is made to grow is entirely divergent.
We will simplify them for you so that you can make the right decision for your family.
What is a Traditional Savings Plan?
Picture a traditional savings plan as a slowly meandering river. At every premium payment, you entrust a portion of your money to an insurance company, which commits to returning a certain amount after the term of the policy has expired. Besides, there may be periodic bonuses added to your policy value.
The Good Side
You are guaranteed the principal amount invested. You need not concern yourself with the volatility of the financial markets, as your returns are independent of it. At the end of the plan, you will be delivered a specific amount. It fits perfectly for conservative goals like funding a child’s higher education or a wedding.
The Slow Side
Since it is quite safe, the returns generally tend to be low. Often they fluctuate somewhere between five and seven per cent per annum. Occasionally, this profit runs behind inflation. Inflation is the increase in prices of everyday essentials like milk, gasoline, and clothes. So, if your money increases at a rate slower than inflation, over time, your savings lose their value in terms of what they can buy.
What is a ULIP Plan?
ULIP is an acronym for Unit Linked Insurance Plan. The best way to understand it is to think that it directly links your investment to the market. Each time you make a premium payment, a small portion of it is allocated to your life insurance cover. The remaining money is invested in stocks or bonds through different funds.
The Good Side
A ULIP plan offers you the possibility of getting a significantly higher return. If the Indian share market does well, your riches grow pretty fast as well. Besides, you have the choice. If you are interested in maximum growth, you can invest in equity funds that acquire shares of companies. On the other hand, if you want greater safety, you can transfer your money into debt funds, which are just like very safe loans. Also, most insurance providers allow you to make fund switches without any charge.
The Risky Side
This time the risk is borne by you. So, if the stock market declines, your fund value may also decrease. Moreover, there is a tough lock-in period. You are not allowed to use your money for the initial five years.
Which One Builds More Wealth?
In case your main aim is to create a large amount of wealth to secure your future, a ulip plan is more likely to come out on top.
This is because of the following factor: market compounding. When you put your money in for ten, fifteen, or even twenty years, your investment will generate returns. After a while, these returns will themselves start generating more returns. That results in the emergence of a snowball effect over time. On the contrary, traditional plans simply cannot keep up with this type of growth, as their interest rates are fixed and relatively low.
However, wealth building is not just about the final number. It is also about your comfort and your age.
- For Young Earners: If you are in your twenties or thirties, you have time on your side. You can manage the ups and downs of the market. A ULIP can help you build a massive amount of wealth for your retirement or long-term goals.
- For Older Adults: If you are close to retirement, keeping your money safe is more important than fast growth. A traditional plan ensures that your wealth does not suddenly shrink due to a bad market week.
The Tax Angle
Both options can reduce your tax burden, but these are the exact things that Indian tax rules say:
If you stay with the old tax system, the money you invest in either of the two schemes can help you lower your taxable income by a maximum of Rs. 1.5 lakh every year under Section 80C.
In the case of the final benefit, old savings schemes mostly enjoy tax exemption. In contrast, for a ULIP, the maturity amount will enjoy absolute tax exemption only if your aggregate annual premium remains below Rs. 2.5 lakh. After that, you will be subject to marginal tax on your capital gains when you unlock your wealth.
How to Choose the Best Savings Plan for Your Home
Your best savings plan will depend on your phase of life and your level of comfort with money. For example, if stock market drops keep you up at night, don’t even consider the ULIP. Just knowing that a traditional plan is there when times get tough is kind of amazing. You have a set amount coming in and can structure your life around that.
However, a ULIP is a great instrument if you want your money to actively counter inflation and you plan to stay invested for at least seven to ten years. It provides you with insurance to safeguard your family now and market leverage to make you wealthy in the future. Reference your family’s needs carefully, see how long you can stay invested, and choose the way that gives you peaceful slumber at night.
