Tax Benefits of ULIPs

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When it comes to financial investments, the first advice given to anyone is - prioritize one’s goals. Thinking about this one may count life insurance as a priority or he/she may have a long-term financial goal like child’s education? An equity mutual fund might get one good returns of which a chunk will ultimately reach the tax department. ULIPs are slowly emerging as one of the best tax-saving investment instruments. That is because a ULIP is the perfect investment solution for the above-stated problems.

What is ULIP?

  • Unit Linked Insurance Plan, often abbreviated as ULIP, is an investment unit wherein the policyholder also gets life insurance coverage as a part of the investment policy.
  • The unique benefit of ULIP is tax benefits. These tax benefits can be availed throughout the term and at the maturity.
  • The reason for the increasing preference for ULIPs over other investment options is its flexibility.
  • It is considered a reliable option for wealth creation in the long term. This is because it is a product which combines returns, tax benefits, and insurance.
  • While a regular life insurance policy doesn’t have much scope for wealth generation, a conservative tax-saving option like PPF doesn’t guarantee good returns. This is where ULIPs stand out from other investment options.

Unit Linked Insurance Plan - An Overview

  • In a ULIP, a portion of the investment is used for the life insurance policy of the policyholder. The rest of the amount is allocated to the investment portfolio.
  • The portfolio can consist of either equity funds or debt funds, depending on the investor’s risk appetite and goal.
  • ULIPs are called unique for their flexibility when it comes to portfolio switch option. The investor can switch between equity and debt funds based on their changing preferences and market performance.

Tax Benefits with ULIPs

  • The amount invested in a ULIP policy is eligible for a deduction under Section 80C. The maximum amount that is eligible for the deduction is Rs.1, 50, 000.
  • Also, the amount received by the policyholder at maturity is exempted from tax under Section 10(10D).

Lock-in Period of ULIPs:

  • The Insurance Regulatory and Development Authority of India (IRDAI) made necessary changes to the lock-in period of ULIP policies.
  • The IRDAI increased the lock-in period of ULIP from three years to five years.
  • However, to get benefit from the policy, one has to invest for the long term, which may range from 10-15 years.

Types of ULIPs:

Though there might be a further classification of ULIPs, it’s usually these three major types.

  • Equity Funds - The premium amount invested in the equity type is spent in the equity market and has a higher risk factor.
  • Balanced Funds - Mostly suitable for investors who are comfortable with a moderate amount of risk; these funds are balanced between equity and debt funds.
  • Debt Funds - If the ULIP is invested in debt instruments, debt funds come in the picture. These funds have low risk.
  • Also, the death benefits differ for policyholders based on the type of ULIP fund they invested in.
  • For type 1 ULIP, the nominee receives the sum assured amount upon the demise of the policyholder.
  • Under type 2 ULIP, the insurance firm pays assured sum plus the fund value to the nominee.
  • ULIPs are divided into these two types based on how much risk does an investor poses to the firm.

Benefits of ULIPs:

  • Life Insurance - Like stated before, this is one of the unique features of the ULIPs. Along with the investment, life cover is offered. In case of unfortunate demise of the policyholder, the sum assured will be given to the investor’s family.
  • In addition to life cover, the investors also get rider options under additional coverage. As of rider options, accidental death rider, critical illness rider and term rider benefits are offered to the investors.
  • Tax-Free Withdrawals - By now the tax benefits that come with ULIPs are clearly defined. However, the advantages of investing in this instrument do not stop there. With unit-linked investments, investors can save taxes on withdrawals. There are three instances in which there might be a withdrawal:
  1. If the policy attains maturity
  2. If the policyholder passes away
  3. The policyholder can get a partial withdrawal after discussing it with his/her insurance company.

While the income generated in mutual funds is entirely taxable, the investor can protect his/her savings generated through ULIPs.The amount generated is usually higher than the sum assured as the benefits from the unit-linked investments is mostly higher.

  • Long-Term Financial Goals - While learning about the lock-in period, one may think ULIP as a policy with a brief term. However, it is not true, instead, it suggests that an investor’s money goals are within the long-run. The net returns from this policy are usually higher because the money gets compounded. So, the benefits are higher even if the investor decides to exit after the lock-in period.
  • Flexibility - As stated earlier, the investor can switch between equity and debt funds based on their goals and market fluctuations. Also, the investor can make partial withdrawals although the terms and conditions are different in various firms. ULIPs have a facility of top-ups which allow the policyholder to increase the premium amount now and then.

Here is the List of the Best ULIPs.

ULIP

Yearly Premium

Age (Min-Max)

Policy Term

Partial Withdrawals

Switches (for funds)

HDFC Life Click2Invest

Min-12,000

Max-no limit

Entry: 0-65 years

Maturity: 18-75 years

5-20 years

Allowed 4 per year

Allowed 4 per year

Bajaj Allianz Future Gain 

Min-25,000

Max-12 lakhs

Entry: 1-60 years

Maturity: 18-70 years

10-30years

Allowed after lock-in

Allowed every year

ICICI Prudential Life time Classic 

Min-30,000-50,000

Entry: 0-65 years

N.A.

Allowed

Allowed

PNB Metlife Smart Platinum           

30,000

Entry: 0-70 years

Maturity: till 99 years

99 minus entry age

One withdrawal is allowed for free

Allowed 4 per year

Max Life Fast Track Super Plan

25,000-1,00,000

Entry: 18-60 years

Maturity:0-70 years

10/20

Allowed after lock-in – 2 per year

Allowed 12 per year

As one can see, every firm has different terms and conditions when it comes to withdrawals/switches. So, it is necessary to read all the documents before purchasing a ULIP.

ULIPs aren’t just budget-friendly or profitable investments. They look time-saving as well. Having several financial requirements mixed into one, ULIPs are one of the best tax saving instruments.