To enable better financial wellbeing in the future, Unit Linked Insurance Plan (ULIP) is among the most popular investments in India. This is because a ULIP plan helps you achieve your long-term financial goals. A ULIP policy combines insurance along with investment.
However, several factors need to be considered before you buy a ULIP. These include your investment risk appetite, ULIP fund management charges, premium payment options, duration of investment, and flexibility of the ULIP policy.
Before you look for a ULIP to buy, it is important to understand the concept of ULIP.
What is ULIP?
A ULIP policy is an investment tool where the policyholder can get the benefit of insurance as part of an investment policy. ULIP insurance aims to provide wealth creation along with a life cover. The concept of ULIP is that the insurance company puts a portion of your investment towards life insurance and the rest into a fund that is based on equity, or debt, or hybrid as the case may be.
Your investments are looked after by fund managers for which you incur ULIP fund management charges that, as per the IRDAI regulations, cannot exceed 1.5%. Amongst the most important features of ULIP are the tax benefits it provides, which we will unravel in detail.
Before you invest in top-rated ULIP plans, it is important to be aware of the three major types of ULIPs:
- Equity Funds: Such ULIPs invest most of their funds in equity and equity-based assets such as stocks of different companies.
- Debt Funds: The premiums for this ULIP plan are invested debt or money market instruments, government bonds, securities, and likewise.
- Balanced Funds: Premiums here are invested in a combination of equity and debt market instruments.
You can seamlessly switch your ULIP plans/funds based on your financial goals and risk appetite.
Additionally, some insurers have introduced newer ULIP plans with minimal charges and unique features. The features of ULIP for these new-age plans include removal of return on mortality charges, on maturity, as well as premium allocation charges.
This category seeks to remove the negative bias against ULIPs and increase awareness towards modified customer-centric changes. Greater awareness about existing policies will help you buy a suitable ULIP for yourself. To know which ULIP to buy, it is important to be aware of crucial factors such as insurance objectives and investment goals and compare ULIP policies.
How does a ULIP Policy work?
To find an apt ULIP in India, you must first know how they work to help you achieve your financial goals. When an individual invests in a ULIP plan, they need to pay a fixed premium for the selected cover amount. The insurer pools money from all the policyholders and invests them based on the funds that they chose.
The total corpus from the invested money is divided into ‘Units,’ each with its specific face value. At any point in time, the value of each unit is termed as the Net Asset Value (NAV). As the value of underlying assets increase or decrease, its effect is reflected in the NAV. Fund managers manage the investment based on the fund type and investment preferences.
It is important to note that as per the IRDAI, the lock-in period for ULIPs is 5 years, and its performance or ability to generate returns is linked to the markets. In keeping with the terms and conditions of the ULIP insurance, if an individual partially withdraws from the corpus, the corresponding number of units is sold. They are also levied with some policy changes in the form of units.
Tax Benefits of Buying ULIP
Aside from the insurance and investment benefits, ULIPs also offer income tax exemption for a maximum of Rs. 1.5 lakhs under Section 80C of the Income Tax Act, 1961. While investors can choose to invest a higher amount, the tax deduction that they can claim is limited to Rs. 1.5 lakhs.
However, if the ULIP is discontinued before two years, the policyholder cannot avail of the tax benefits under Section 80C. You can use a ULIP calculator to see how much premium is required for your plan, as well as for checking the ULIP returns.
Apart from this, the death benefit payable to the nominee is completely exempt from taxation under Section 10(10D) of the Indian Income Tax Act.
Budget 2021 Taxation Changes: ULIP Capital Gains Tax on Maturity Pay-out
Additionally, it is important to note that the Finance Bill 2021 has proposed certain revisions for the tax deductions and exemptions for ULIPs:
- As proposed by the Finance Minister, policies bought on or after 1st February 2021 where the unit premium paid is more than Rs. 250,000 would attract ULIP capital gains tax. ULIPs will be considered a ‘capital asset’ with the gains or losses chargeable to income-tax under the head ‘capital gains’ in the year of receipt.
- For premiums below Rs. 250,000, the said budget proposes an exemption restricted to aggregate policies whose combined premium is up to Rs. 250,000
- For policies purchased before 1st April 2012, the premium to sum assured should not exceed 20% for the proceeds to be tax-free.
Simply put, the maturity benefit is taxable as Long-Term Capital Gains (LTCG) if the total annual premium paid exceeds Rs. 2.50 lakhs. If the annual premium is below Rs. 2.50 lakhs, then the maturity pay-outs are exempt from taxation under Section 10 (10D).
While the revision might sound discouraging, if policyholders are investing within Rs. 250,000 annual premium limit, the gain in terms of tax-saving remains highly attractive.
Additionally, ULIPs still remain an attractive investment solution in comparison to its direct competitor, the Equity Mutual Funds. With ULIPs, you get life cover, and the premium paid, and death benefits are exempt from taxes. This makes ULIPs a viable investment avenue despite the taxation changes.
An ideal ULIP plan in India is flexible to changing financial needs and grows with you. It is also an affordable policy that offers life insurance for family protection, saves and invests for future goals, and provides tax benefits.
Conclusion
A ULIP is a powerful financial product that enables you to secure the financial future of your family while adding to your wealth through investments. However, to buy a ULIP that suits your needs, it is important to analyse your risk appetite and take investment decisions accordingly.
Edelweiss Tokio Life Insurance offers Wealth Secure Plus that offers a perfect savings solution to save for the crucial stages of your life, such as children’s education, their marriage, your retirement, and so much more.
Some critical features of the plan include full life cover up to 100 years of age, small monthly premiums to start, attractive boosters and additional pay-outs, and long-term plus short-term plan offerings. More importantly, we offer unlimited fund changes with all our ULIP plans, understanding the fact that your goals and risk appetite might change.