Life uncertainties can strike without any prior warning. You can lose your job, someone in the family can fall ill, or even something even worse could happen – like your untimely dismissal. Having an emergency fund to take care of a sudden financial crisis is thus necessary.
An emergency fund is an amount that you keep aside to use in case you or your family is facing a financial turmoil. With an on-going pandemic, the importance of an emergency corpus is quite evident. So, how can you build one with ULIPs?
To understand how you can build an emergency fund with a Unit Linked Insurance Plan (ULIP), you have to understand what the policy is and what are its benefits. Let us begin.
The Unit Linked Insurance Plans or ULIPs are an insurance instrument that offers the benefits of wealth creation to its investors. The policy provides dual benefits of life insurance cover and investments in market-linked funds.
Some of the highlighting benefits of ULIP investments are as follows –
- The policy offers dual benefits of life insurance and wealth creation.
- Investors have the liberty to choose the type of funds they want to invest in – debt, equity, or hybrid funds.
- The policy also offers a fund switching facility to shift your investments from debt to equity and vice versa.
- The premiums paid towards the policy can be claimed for tax deductions under Section 80C of the old tax regime. The maturity and death benefits are tax-free as well under Section 10(10D) of the Income Tax Act, 1961.
- The policy comes with a five-year lock-in period.
- You can make partial withdrawals after the completion of the lock-in period.
- There are fewer ULIP charges applicable to investors as per the IRDAI norm.
How to build an emergency corpus with ULIPs?
Now that you have an overview of ULIPs and its features let us take a look at how you can build an emergency fund with it.
First, you need to know that ULIPs help you accomplish your financial goals. To align your ULIP insurance with your goals, you need to evaluate your current financial situation, monthly expenses, and future financial objectives. This will help you choose a plan that best suits your needs.
But when it comes to emergency funds, you need to understand that it is the amount that you can have access to at any point in life. When managing your future finances, it is necessary to contribute a certain amount towards this corpus. That way, when a financial crisis arises, you do not have to dig into your life savings to manage the situation.
ULIPs are goal-based investments. So, if you want to invest in ULIPs to build an emergency fund, you need to be aware of certain things. As mentioned earlier, ULIP comes with a five-year lock-in period. This means you cannot withdraw money from the policy until the lock-in period ends. In a way, it is better to have such a restriction as it helps you build an amount that is sufficient in case of financial emergencies.
In addition, you can contribute a surplus amount over and above your existing ULIP premiums to ensure that you have a strong emergency backup when the time comes. That way, the extra money that you might have is kept safe from being used for unnecessary expenses.
It is wise to have access to an emergency fund in case of emergencies. However, after the five-year lock-in period ends, do not terminate or withdraw money immediately from your ULIP investment. Keep contributing towards the policy until it matures. This is because, when you are invested in long-term ULIPs, the policy tends to perform much better and yield high returns.