What is the benefit of ULIP?

Confused about where you’re going to invest your hard-earned money? The options in the market are plenty. There’s fixed deposit, stock market, mutual funds, PPF, etc. All of them vary in their features and serve very different motives. In the last couple of years, a new kind of investment product has come to the limelight - United Linked Insurance Plans (ULIPs). This is a product offered by insurance companies that gives policyholders/investors the dual benefit of insurance and investment. What it essentially does is invest part of the premium in shares/bonds etc. and the remaining into providing an insurance cover.

ULIPs are a lucrative investment choice for many reasons. Some of them include:

Flexibility

ULIPs generally come with a range of equity, debt and balanced fund options. You can invest your money depending on your risk-appetite and financial needs. ULIPs give policyholders/investors the opportunity to move money between different funds (this is called switching) for the purpose of earning maximum returns. Generally, four switches are allowed free of cost during a year.

Tax benefits

Not all investments allow you to claim tax benefits. Since ULIP is a form of life insurance product, it offers tax benefits. Under Section 80C of the Income Tax Act, 1961, you can claim a tax deduction of up to Rs. 1,50,000 for the premiums that you pay. Additionally, the proceeds from the policy are exempt from tax under Section 10(10D) of the Income Tax Act. Thus, a ULIP not only helps you with wealth creation, you are also able to save on taxes. LTCG tax is also not applicable to ULIPs.

Long-term investment

ULIPs are a long-term insurance contract, with a lock-in period of five years. This can help you inculcate the habit of disciplined investing. The lock-in period begins from the date that the policy is issued. Premiums can be paid regularly – monthly, quarterly, half-yearly and yearly, or as a lump sum. It is advisable to pay premiums on a regular basis as you will be able to claim a tax deduction under Section 80C every year. In case you opt for a single premium policy, you can only claim a tax deduction for the year that premium is paid.

Potentially better returns than peers

ULIPs have the potential to fetch better returns compared with other insurance products on account of its equity advantage. Premium are invested in various asset classes via different funds. Aggressive investors can choose to invest in equity-oriented fund. It has often been observed that equity and tax-saving funds have given double digit returns. The amount received on maturity, however, will come down to the performance of the equity market during the tenure.

Life cover

Since ULIP is a kind of life insurance product, it provides risk cover along with investment options to park money in any number of qualified investments. Now, since it has a life insurance component, you can be assured that your beneficiaries will receive the sum assured in the event of your demise during the policy period. Your loved ones can use this money in any manner they want - to cover everyday expenses, repay a loan, pay off college fees, etc.

Why ULIPs are a Better Option than Mutual Funds?

With ULIPs gaining popularity, it has often been debated whether or not they are better than mutual funds. While the two allow you to take part in the markets, they function quite differently. The choice of investment actually comes down to your financial needs and outlook. If you are looking for a pure ‘investment’ product, then you can go for mutual funds. On the other hand, if you are seeking protection for your loved ones along with reaping the maximum benefits from your investment, then you must go for ULIPs.

ULIPs fare above mutual funds in the following ways:

• You get a life insurance cover, which will help financially secure your loved ones in case something untoward happens to you.
• You can claim tax benefits on the premiums that you pay, and the proceeds from the policy are completely tax free. In case of mutual funds, taxes are applicable on the capital gains. However, LTCG is not applicable to ULIPs unlike for mutual funds.
• You can get additional benefits in the form of riders in ULIPs. Critical illness rider, accidental permanent total or partial disability benefit rider and accidental death benefit rider are some of the add-ons that can be attached to the base plan. Mutual funds do not have such facilities.
• You can make free switches between equity funds and debt funds up to a certain limit under ULIPs. In case of mutual funds, you will have to pay entry and/or exit charges if applicable, then make a complete exit and then make a fresh investment.

To sum it all up, ULIPs work better for people looking for risk cover, good returns and greater transparency. It should be viewed as a hybrid product, which offers the best of both worlds investment and insurance. Finally, it should be noted that the choice of a particular investment scheme actually comes down to your needs and risk-taking abilities. If you decide to go with ULIPs, it is advisable to first consider consulting with insurance experts. They can help you understand the different schemes, based on your preferences, and accordingly assist you in finding the best investment plan.

Recommended Read: ELSS vs ULIP: Which Is A Better Tax Saving Investment For 2019-20?