The proposal to impose 10% tax on Long Term Capital Gains (LTCG) in the Union Budget has caused worry among investors. In an attempt to save tax, considerations are made to purchase Unit Linked Insurance Plans (ULIP) which will not attract the new LTCG tax.
Whether or not you should consider investing in a ULIP is a decision you need to make on your own based on your financial goals. Consider the following to make a calculated decision.
What is a ULIP?
A Unit Linked Insurance Plan is a product where insurance and investment benefits are integrated into one. These are offered by insurance companies and was first launched by Unit Trust of India (UTI). These are mainly offered in India.
How does ULIP work?
ULIPs are a combination of insurance and investment. When you pay a premium, a part of it is used by the insurance company to provide you insurance coverage and the remaining is used to invest in debt and equity securities.
How is ULIP similar to mutual funds?
- Just like mutual funds, the premiums are pooled together to be invested in proportions and you can personalize your investment based on your investment need and risk appetite.
- Your ULIP will hold a certain number of funds which has its NAV(Net Asset Value) declared on a daily basis. The value of each unit of a fund is calculated by dividing total value of the fund's investment by total number of units.
- Rate of return is determined through NAV.
How is ULIP different from mutual funds?
ULIPs have a minimum lock-in period of 5 years. It also includes insurance coverage. With an equity mutual fund scheme, you have the freedom to sell it off if you are not satisfied with its performance. The decision to withdraw from your ULIP becomes tough as you will lose your insurance cover.
How is ULIP similar to an Insurance Policy?
- You will receive life coverage just like a life insurance policy.
- You require to pay a premium to the insurance company. The premiums vary depending on you plan. A lump-sum amount (single premium) can be invested initially or you can opt for periodic payment with annual, semi-annual or monthly premium.
Advantages of ULIP
- Market-linked: Since the funds from ULIPs are invested in market-linked instruments, you stand a chance to receive exceptional returns if the market goes in your favour.
- Life coverage: With its insurance policy characteristics, it will provide life protection coverage.
- Long-term Savings: ULIPs are usually stretched to a period of 5 or more years. Just like an insurance plan, it requires a long-term commitment to paying premiums which will pay-off well when the policy matures.
- Flexibility: ULIP gives you the option to switch between different investment plans as per your needs.
- Tax-free: Gains from ULIPs are tax-free under section 80C and 10D.
Apart from the option to switch between different investment plans as per your needs, you can partially withdraw your investment (subject to charges).
You can also make single premium additions to increase your investment. Single premium means payment of a lump-sum amount.
You can choose to pay a lump-sum amount as a single premium or opt for periodic payments based on your plan for a certain number of years.
Risks in ULIP
Just like you have heard or read in every insurance companies advertisement ever "they are subject to market risks. Please read the policy documents carefully before investing." Make sure you read and understand the ULIP's prospectus before you purchase it.
Your returns from your Unite Linked Insurance Plan are directly linked to market performance and you as a policy holder will bear the entire risk.
Charges applicable on a ULIP
The insurance company will impose charges like Administration charges, Fund management charges, switch charges, surrender charges, mortality charges, premium allocation charge, partial withdrawal charges, etc. These vary depending on your insurance company's policies.
Companies that provide ULIP
- LIC of India
- SBI Life
- Aegon Life
- Edelweiss Tokio Life Insurance
- Reliance Life
- ICICI Prudential
- HDFC Life
- Bajaj Allianz
- Aviva Life Insurance,Max life insurance
- Kotak Mahindra Life
- DHFL Pramerica Life Insurance
The withdrawal of ULIP will occur at the death of the policy holder, maturity of the policy or partial withdrawal at the policy holder's will.
- Death benefit: Withdrawal at the death of policy holder is completely tax free.
- Maturity: Benefit received on maturity is tax free under 10D.
- Partial Withdrawal: If the withdrawal does not exceed 20% of the fund value of the policy and is made after the completion of lock-in period, it is tax-free.
- Premium: You can claim tax exemption on the premiums paid on ULIP that are invested in equity, debt, or money market instruments under section 80C. The limit for section 80C is Rs 1.5 lakhs for the current as well as coming year.
- Premium additions: The additional premiums introduced into the plan at a later stage is exempt from tax under section 80C and 10D, if it does not exceed 10% of the sum assured.