Considering tax-free ULIPs over mutual funds

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.