The
popularity of unit linked insurance plans is taking over the insurance industry
since the plans have been differing from the characteristics of the traditional
plans. It has given tough competition to the mutual funds widely. Pay attention
to this article to know why it is the time to choose unit linked insurance
policy over mutual funds.
ULIP is found to expose the user to market risks
similar to the mutual funds; however, both of them differ on a large scale
judging their various aspects such as liquidity, charges and return potentials.
The unit linked insurance policy is considered a solid financial product for
those seeking investment and insurance without risking too much. Albeit the lower
allocation charges and more returns, unit linked insurance policy remains a
favourable choice among all.
ULIP: Overview
The unit linked insurance policy is the
perfect combination of insurance and investment. There is a lock-in period of 5
years for limited liquidity and the fund management expenses are low,
approximately 1.35%. As the unit linked investment is the subtle example of
investment along with life cover, it is more convenient for people.
It has been a great product when the stock
rise is hiking and the user wishes to benefit out of capital appreciation. ULIP
returns are ideal for influencing people to utilise the speculative product for
making more money easily. However, various charges can be the barrier during
the decline of the market.
Due to the hue and cry about the allocation,
fund management or mortality charges, the IRDAI
has already restructured ULIPs. Considering the safety aspects, the ULIP edges
further than the investment products in the market. However, term insurance is
necessary after choosing a unit linked insurance policy. Here, the sum assured
is high compared to any other insurance plans.
Features of Unit Linked Insurance Policy
The investment options of ULIP include investing in debt funds or equity funds. You can also
invest in both of them. Offering you the freedom
to transfer money from funds to funds, it is highly convenient for achieving
financial goals.
●
ULIP
Tax Benefits – According to Section 80C of the Income Tax Act
of India, a user can enjoy tax exemptions of the unit linked investment. The
amount of tax-exemption can be up to Rs. 1.5 lakhs on the premium of the
policy.
●
Top Up
Facility - The tax-benefits are applied for the top ups. If the policy user has
surplus cash, it can be invested by making use of the top up. When the premium
is below 10% of the sum assured, you can get tax benefit out of the paid
premium as per the rule of Section 80C.
●
Benefit
on Maturity - Other ULIP policy benefits include planning
taxes beforehand due to the provision of a lock-in
period of 5 years. If you withdraw money after the maturity period, the
procedure is not included under taxes. It helps the user save a huge amount of
money.
ULIP benefit is related to the payment of
premium and it differs for debt, money market investment and equity. The
maximum limit for deduction is Rs. 1.5 lakhs and it is great for being eligible
for tax deductions on the premium.
Is Mutual Fund a Better Idea?
Mutual fund companies unanimously agree that mutual fund is better than unit linked
investment because the former remains as a complete investment product.
Assessing the risk exposure, there are various types of mutual investments and
balanced or hybrid funds that look after both, debt and equity. The equity
mutual funds are majorly based on the equity.
The equity linked saving or ELSS offers tax
deductions. Apart from ELSS, you can opt for withdrawal of the fund instantly
by paying 1% of the fund value. The fund management charges are higher than ULIP, ranging around approximately
2.5%.
The biggest advantage of the mutual funds is
the rich history in the investment industry. As the mutual funds have been in
the market for a long time, the investor can check mutual fund returns easily
and choose the right mutual fund company accordingly.
With the implementation of 10% of LTCG or
long-term capital gains tax on the equity mutual funds, the users perceive the
unit linked investment as a more convenient choice.
ULIP v/s Mutual Fund
●
Low allocation charges for a unit linked plan but
2.5% for mutual
fund (MF)
●
No mortality charges for MF but high charges
in older age groups in unit linked plan
●
No policy administration charges for MF but
Rs. 700-1000 yearly in ULIP plan
●
15% STGC and 10% LTCG for mutual funds but ULIP
gets tax benefits under Section 10(10)D
With the regulatory cap levied on the ULIPs,
they have become more attractive to the customers. Now the plan helps in
yielding a high amount of returns than
the previous time. The incentive programs like Guaranteed Loyalty Additions for
investment prolonging more than a decade have become enticing to every
investor.
The level of flexibility is high as the
investor can switch between debt funds or equity funds evaluating the market
situation. However, the traditional MF policy restricts people to avail such
benefit. In addition to the context, there are a certain number of free
switches provided to the users but exceeding the number, you may have to pay a
small cost.
Then, which one to Choose?
Before concluding with your final decision,
ask yourself certain questions which will help you reach the financial goal on
time. Keep in mind the following aspects,
●
Risk appetite
●
Financial goal
●
Any plans for retirement or to compensate
foreseen costs
●
Life cover
●
Investment horizon
A person with a long term financial plan can indulge in the benefits of ULIP. If it is to fulfil a child’s education or maintain a regular
lifestyle after the retirement, unit linked insurance policy is the best one,
due to its life cover and maturity benefits. Providing dual benefit of protection
and investments in one solo plan, it surpasses the framework of mutual fund interest rates.
Moreover, if you are not well-acquainted with
the equity market and other fund options, a mutual
fund can only be disadvantageous in your life. After paying out the LTCG in MF
for the long term, the mutual return
rates would remain the same. However, a unit
linked insurance plan exceeds the returns of MF providing a better way to make
easy money.
