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Unit Linked Insurance Plan (ULIP)
We all have a wish list somewhere – a new house, a lavish family vacation or a luxury car. These wishes can be fulfilled with a disciplined investments in a plan helps you accumulate money and also protects it. A very popular plan in an insurance company’s kitty is a ULIP. Unit Linked Insurance Plan (better known as ULIP) is a life insurance product which in addition to providing risk cover to the insurance seekers, also gives investment options. It is a market linked product which gives flexibility in investing in qualified capital market investments like equity or debt funds as per the investor’s convenience. In ULIP it is very easy to monitor your investments made. At a time when the share market and mutual funds were dominating individual’s investment portfolios, ULIPs were launched by insurance companies to lure customers with the promise of high investment returns. Today, Due to several changes made by the insurance regular (IRDAI) in recent past, ULIPs have become cheaper than the mutual fund investments.
In addition to this, ULIPs prove to be the best when it comes to investing for your long term goals like child’s education, retirement, etc. This is because ULIPs have a five year lock-in period. Benefits such as transparent structure and payment process, flexibility in switching between funds based on your risk appetite, numerous fund options right from debt, balanced and equity for both: risk takers and non-risk takers. And most important of all it provides protection (life cover) to all the policyholders.
What are Unit Linked Insurance Plans (ULIPs)?
ULIP stands for unit linked insurance plans. ULIP is a combination of insurance and investment.
ULIPs are a type of ‘Protection + Savings’ plans. They combine the benefits of protection and saving in a single instrument. The major advantage that a ULIP has over the traditional wealth creation tools is the benefit of a Life Cover. As a result, your money continues to grow and at the same time, your loved one’s future is protected from life’s unexpected turns. ULIP are one of the best investment plans to help you create lumpsum and fulfill your wishes. Along with a life cover, these plans help you stay on top of the market changes through good returns on investment. This is because they provide a combined benefit of life cover with investment growth. The investments made in ULIP plans are subject to risks associated with capital markets. Insurers offers you a variety of ULIP products depending on your risk appetite and financial goals-be it for your retirement planning, child’s education or marriage or for investment purposes.
In most wealth plans, you pay your premiums for a certain time period, a small amount of the premium goes to secure life insurance and rest of the money is invested just like a mutual fund does and accumulates the units. Once your policy term ends, you receive a lump sum amount called the Maturity Benefit. Moreover, in case of an unfortunate event during the term of the policy, your family receives an amount called the Sum Assured.
ULIP offers investors options that invest in equity and debt. An aggressive investor can pick equity oriented fund option whereas a conservative one can go with debt option.”If you have a long term ULIP, go for equity oriented fund option -which is called a growth option,” The recently launched ULIP are better than the older ULIP due to lower charges. One can pick and choose the low cost ULIP. While traditional insurance plans offer 4% to 6% returns, ULIP can offer you double digit returns if you are invested in equity funds.
Who should invest in ULIPs?
- If you want growth with protection on your money
- If you seek flexibility to manage your money
- If you want transparency of your investments
Reasons to buy a ULIP
Investing in a ULIP for long term can be a smart decision because:
Regular Savings: It is safe and secure investment with healthy market returns. ULIPs inculcate the habit of regular and disciplined savings, which is the key to successful long-term financial planning. With regular premium payments, you can enjoy the uninterrupted benefits of wealth creation for your loved ones.
Protection: It also provides life cover to which keeps your family secure in your absence.
Flexibility of Investment: It offers flexibility to make changes to funds thereby securing your money from market ups and downs. You will have flexibility and control of your money through the following ways:
1. Fund Switch – An option to move your money between equity and debt funds
2. Premium Redirection – An option to invest your future premium in a different fund of your choice
3. Partial Withdrawal+ – An option that allows you to withdraw a part of your money
4. Top-up – An option to invest additional money to your existing savings
Tax Benefits: It enables you to save tax on your investments and returns, You can get tax benefits up to `1.5 lakh on your insurance premiums, under Section 80C. Also, the earnings from your policy and the equity-debt switches are completely tax-free. What’s more, even the money you receive at the end of the policy, also called the Maturity Benefit, is tax-free as per Section 10(10D).
Benefit from long-term Growth: One of the greatest advantages of investing in a ULIP is its long-term benefits. You may pay premiums for a greater time horizon and enjoy the benefit of long-term growth by investing in the market for a longer tenure to receive higher returns. The accumulated amount may be used to meet specific goals such as your children’s educational expenses, down payment for a home loan, or retirement planning.
Greater Rewards for Staying Invested: Your money grows further as the insurance company adds to your savings without the need for you to invest more. Such benefits are called bonuses and are available to you in both ULIPs and Endowment plans in different forms (such as, Loyalty Additions and Wealth Boosters).
Are ULIPs better than mutual fund investments?
Mutual funds and ULIPs are both market linked products which give you capital appreciation. In both the instruments your money is invested in the market i.e. shares, bonds, debt instruments etc. It is easy to invest money through either of them. Traditionally ULIPs were not very popular among investors but the new age plan has changed the face of ULIPs. It has the best performing fund options, no allocation charges, you can invest easily just like SIP.
With the introduction of long-term capital gain (LTCG) tax on equity, a debate has opened whether equity mutual funds have lost their charm to ULIPs. Many investments Gurus have argued that ULIPs have become more lucrative after the introduction of the tax on LTCG from equity investment. There is no tax on capital gains from ULIPs. However, taxation is not the only criteria for selecting investment products. There are some other factors which investors should consider while selecting investment products, like the purpose of investment, risk, return, liquidity, flexibility, transparency, cost, taxability, etc.
The most important feature for selecting this new age ULIP over mutual funds is that along with the additional allocations and other amazing benefits it also has a three layered tax benefit structure available, i.e. investment, dividend and maturity amount are all exempt from tax.
In ULIPs the investment is tax-deductible under the section 80(C) of Income Tax Act. So you can reap the benefits for the entire premium amount you pay. Later, when the final maturity amount is received, it is exempted under section 10(10 D) of Income Tax Act. In fact, any income incurred through ULIP is tax free for the policyholder and the nominee.
The choice of investment products depends on one’s investment horizon. Individuals who want to build a corpus through regular contribution over the long term need a product that is designed with a long-term objective. Equities as an asset class provide superior returns over the long-term. Ulips and mutual funds work well for those who are looking for an exposure to equities. It has been widely believed that Ulips are better than other financial services products over a long-term horizon. However, the recent changes to LTCG tax have made Ulips a compelling proposition for relatively shorter-term horizons as well. There are other reasons why Ulips are better. First, they offer dual benefits of long-term investment and protection cover. The protection cover serves as a safety net for the family. Second, unit-linked products offer the flexibility to provide individuals the opportunity to switch between different funds-equity, debt or balanced funds-depending on one’s view of the markets, without invoking a tax liability. Finally, Ulips inculcate the discipline to save regularly for the long term. The only shortcoming of Ulips is the inability to liquidate funds in the first 5 years. But, as most people invest with a time horizon of longer than 5 years, Ulips are an attractive investment vehicle to meet long-term investment goals.
Below are the factors to be considered before selecting Investment Products
Purpose Of Investment
You can't reach the destination if you don't know the address. Investors with vague goals can't meet their financial obligations no matter how hard they try. First, your goal and purpose of investment needs to be defined clearly.
Over a long period, even a small difference of 2-3% can significantly change the corpus due to compounding.
Liquidity is a very important criterion for selecting an investment product. You should be able to liquidate your investments when you need them. Equity mutual funds are highly liquid, a person can redeem his units any time. On the other hand, a person can't withdraw his money from ULIPs before 5 years as that is the minimum lock-in period.
Mutual funds are way more flexible than ULIPs. Mutual fund investors can switch from one scheme to another within a fund house or to another fund house, which enables investors to switch from poorly performing schemes to better ones. On the other hand, ULIPs provide some flexibility to investors to switch from equity to debt and vice-versa within the insurance house only. So, if a fund manager of a ULIP joins another insurance company, the investor can't switch to the new insurance company, whereas it possible in mutual funds.
ULIPs used to have very high charges in past but now they compete with mutual fund schemes on charges. If a person invests in a ULIP via online, he does not have to pay administrative or fund allocation charges. Mutual fund schemes also have very competing expense ratios. Investors can further reduce the expense ratios by investing in direct plans.
ULIPs are always more tax efficient than mutual funds. Capital gains from the ULIP are tax-free, whether it is equity or debt. Whereas, investors have to pay 15% tax on short-term capital gains and 10% tax on long-term capital gains (from April 1, 2018) from equity mutual funds. The short-term gains from the debt funds are taxed at a marginal rate, while long-term capital gains are taxed at 20% after indexation.
ULIPs are always more tax efficient than mutual funds, but the recent introduction of 10% LTCG tax from equity investments has given them more advent. However, you don't select an investment product based on one criterion. Mutual funds outscore ULIPs on other parameters like returns, transparency, liquidity, and flexibility.
The Indian mutual funds industry is one of the most regulated and transparent industries in the world. The returns, portfolios, and sector allocation of mutual funds are available on AMC and various other websites. The benchmark, expense ratio, and exit load is also disclosed by AMCs and is available on various websites. Besides, many analysts and investment advisors track mutual funds. ULIPs also disclose the same information but they are not widely tracked by the analyst community.