There are several advantages that you stand to enjoy by investing in a ULIP. Here are a few of them –
- An ULIP could be one of the preferred option for long-term market linked wealth creation to achieve your life goals.
- It offers you an insurance cover.
- A ULIP comes with several tax benefits under sections 80C and section 10(10D) of the Income Tax Act, 1961 subject to conditions specified therein.
- It helps inculcate some much-needed financial discipline in terms of a savings habit.
Features 0f ULIPs
Some of the salient features of ULIPs are as follows –
● Market Exposure
The premiums that you pay towards ULIPs are invested in market-linked securities. There are different types of investment funds, like equity funds, debt funds, balanced funds, etc. You can choose a suitable fund based on your risk profile and investment strategy. The premium is directed to the chosen fund, and you can earn market-linked returns, which are not guaranteed.
● Insurance Protection
ULIPs are life insurance plans that allow insurance coverage during the policy tenure. There are 2 types of ULIPs in terms of insurance coverage6. In the case of premature demise in Type 1 ULIPs, sum assured or the fund value whichever is higher is usually paid. However, in the case of Type 2 ULIPs, sum assured as well as fund value is usually paid out to the nominee if the life insured dies within the policy tenure. If your invested premium does not earn sufficient returns, the death benefit is guaranteed* for your family’s financial needs.
● Liquidity
ULIPs have a lock-in period of 5 years, after which you can make partial withdrawals from the fund value to get liquid funds for your financial needs.
● Flexibility
ULIPs allow multiple flexible features which can be opted subject to policy terms & conditions. Some of which include the following –
- Switching – It allows you to change between the available investment funds depending on your risk appetite and the changing market dynamics.
- Top-up – Paying additional premiums during the policy tenure to increase the investment in the fund.
- Premium redirection – changing the allocation of the subsequent premium to another market-linked fund.
● Tax Benefits
Premiums paid for a ULIP enjoy tax deduction under old tax regime, as per Section 80C of the Income Tax Act, 1961, up to Rs.1.5 lakhs and are subject to specified terms and conditions1. The death benefit received is tax-free. On maturity, the benefit received, and the returns earned would usually qualify for a tax exemption under Section 10(10D) if specified conditions are fulfilled2.
ULIP Policy/policies issued on or after 1 February 2021 with annual premium more than Rs. 2.50 lakhs are treated as Capital assets and gains from such policies is taxable as per underlying holding as Capital Gain. Switching between funds are also tax free3.
Four Factors That Will Help You Compare ULIP Plans in India
When you are looking to compare ULIP plans in India, consider a ULIP that offers optimum flexibility with respect to the premium payment frequencies.
1. ULIP NAV and Fund Performance
The ULIP NAV is another factor that people may take into consideration when comparing multiple plans. NAV stands for Net Asset Value and represents the per unit cost of the fund. It shows the market value of the underlying assets4.
NAV is calculated using the following formula4 –
NAV = (Market value of the fund’s portfolio + existing assets – existing liabilities) / total number of units
Although you might be tempted to invest in a ULIP with a low NAV, you should know that it might not always be the suitable option. While a ULIP with a lower NAV allows you to purchase more units of the fund, what may matter more is the fund performance.
Therefore, when you compare ULIP plans in India, it is important to first check the fund’s performance before looking at a ULIP NAV. To check the same you may take up the previous performance metrics of the funds to get a basic overview of how it has fared during the various ups and downs of the market. While the past performance of a fund may give you a fair idea of the amount of returns that you may expect from it, please note that it is not always a guaranteed indicator of its performance in the future.
2. Investment Options
The beauty of ULIP plans is that they come with a wide range of investment options with varying degrees of risk and returns. The investment options that ULIPs offer can be broadly categorized into - equity funds and debt funds or a combination of both.
Equity funds offer relatively higher amount of return, but also carry a higher amount of risk. Debt funds are safer, but their returns are quite lower. Therefore, when comparing multiple ULIPs, the investment options that they offer may also be an important factor. That said; always ensure that the investment option of the ULIP that you choose matches your own risk-return profile.
3. Costs associated with the ULIP
With a ULIP, there are several costs associated with a plan, such as fund management charges, allocation charges, and mortality charges, among others. It is essential to choose a plan that suits your needs and is as per your risk appetite.
Therefore, as a prospective investor, you will have to account for all of these costs when you are out to compare ULIP plans in India. Remember, even a mere 1% difference in the costs can turn into a large enough amount over the long term.
4. Option to Switch Funds
Almost all ULIP plans come with the option to switch the type of investment fund midway through your investment tenure. However, many plans may impose a restriction on the number of times that you are allowed to make the switch free of cost. If the number of switches exceed, a charge is usually levied.
While some may restrict you to a few free switches during the entire tenure, others may offer unlimited switches without any restrictions whatsoever5. It is always preferred to go for a ULIP policy with no restrictions on the number of switches even if you think that you may not utilize the option.
Conclusion
While these are some of the important factors that you should consider when you are out to compare ULIP plans in India, this list is by no means exhaustive. That said, when investing in a ULIP consider holding it for the long term, since that is when you may tend to enjoy optimum benefits and can look forward to get your life goals done.
FAQs
1. What is a ULIP policy?
A ULIP policy is an investment-oriented life insurance plan which allows insurance protection plus market-linked returns on the premium. The plan also allows flexibility in the form of switching, premium redirection, top-ups, etc.
2. Is it good to invest in ULIP plans?
If you want to invest in a market-linked fund, which is managed professionally, plus insurance protection, it would be good to invest in ULIPs. The plan would help you earn market-linked returns on the premium paid, enjoy tax benefits, get insurance coverage and also create a sufficient corpus for your financial goals.
3. What can be the preferred way to choose ULIP?
When choosing a ULIP, you may assess your –
- Financial goals
- Investment horizon
- Risk appetite
- Premium affordability, etc.
Then, you can compare the available ULIPs and choose a policy that would help you create funds for your financial goals. You may compare the ULIPs based on their -
- Past returns~ and the consistency of such returns
- Charge structure
- Additional returns during the policy tenure like loyalty additions or fund boosters, if any
- The type of benefit payout – lump sum, regular income or a combination or both.
- Claim Settlement Ratio of the insurance company –
Choose a suitable ULIP and then invest in the best plan.
Reference
1. https://incometaxindia.gov.in/tutorials/20.%20tax%20benefits%20due%20to%20health%20insurance.pdf
2. https://www.taxmann.com/post/blog/taxation-of-life-insurance-policies-section-10-10d/
3. https://www.tomorrowmakers.com/other-investments/taxability-ulips-understanding-new-norms-article
4. https://www.bajajallianzlife.com/life-insurance-guide/ulip/ulip-nav.html
5. https://www.bajajallianzlife.com/life-insurance-guide/ulip/4-ulip-fund-switching-benefits.html
6. https://www.businessworld.in/article/ULIP-s-Type-1-Or-Type-2-/02-03-2017-113712/
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