In the world of investments, products with twin benefits resonate strongly with customers. As Indians look for options to safeguard their family’s future and also grow wealth, Unit Linked Insurance Plans (ULIPs) are gaining recognition as a versatile and promising option.
Let numbers do the talking here. As per Life Insurance Council MIS data, Indians paid linked renewal premium of over ₹69,000 crore up to March 2023, nearly double of the ₹38,000 crore in 2013. This is testament to the fact that ULIPs are a financial tool that not only act as a safety net for your loved ones, but also allows you to tap into the potential growth of the market.
How ULIPs Work
When you invest in a ULIP, your premium is divided into two parts. One small part goes towards providing life insurance coverage, ensuring your family’s financial security in the event of your untimely passing.
The other substantial part, after fees, is invested in the funds you choose, with the potential for growth over time. The value of your ULIP investment is directly linked to the performance of these funds, making it an essentially market-linked product.
Let’s say, you invest ₹50,000 annually in a ULIP. A portion, say ₹5,000, goes towards life coverage, and the remaining ₹45,000 is invested in market-linked funds of your choice. For example, if you opt for equity funds and the market performs well, your investment could grow to ₹55,000.
ULIPs offer flexibility to switch between funds based on market conditions. For example, if the equity market seems volatile, you could switch to debt funds for stability. Most insurers offer a certain number of free switches per policy year. Note switching between funds within a ULIP does not attract any capital gains tax.
ULIPs in India come with a mandatory 5-year lock-in period. This means you cannot withdraw money partially or surrender your ULIP policy before five years from its start date. This lock-in period encourages long-term investment and also ensures sufficient funds are accumulated.
ULIP Costs To Know
It is crucial to understand the various fees and charges associated with ULIPs.
Premium Allocation Charge: This charge is deducted from your premium before the remaining amount is invested in your chosen funds.
Fund Management Charge: This fee covers the cost of managing the investment funds within your ULIP.
Mortality Charge: This charge is for the life insurance coverage provided by the ULIP. Younger individuals generally have lower mortality charges.
Policy Administration Charge: This covers administrative expenses related to managing your policy.
Switching Charge: You may incur this fee if you switch between different funds within your ULIP.
Partial Withdrawal Charge: This charge applies when you partially withdraw funds from your ULIP before the policy matures.
Surrender Charge: If you decide to surrender your ULIP before its maturity, you may be subject to this charge.
The Appeal of ULIPs
Unit Linked Insurance Plans (ULIPs) have captured the attention of Indian investors for good reasons.
One of the standout features of ULIPs is their unmatched flexibility. You can tailor your ULIP to match your evolving financial goals and risk tolerance. If your focus shifts from aggressive growth to safeguarding your capital, you can easily realign your portfolio.
In addition to the core life cover, ULIPs offer a range of riders for enhanced protection. These riders are like optional add-ons that cater to specific needs. For instance, a critical illness rider can provide financial support if diagnosed with a serious medical condition. An accident cover offers a safety net in case of unforeseen mishaps. These riders can be invaluable in safeguarding your family’s financial well-being during challenging times.
ULIP Tax Benefits
Understanding the tax implications of ULIPs is crucial to make informed financial decisions.
Tax Benefits on Premiums: Under Section 80C of the Income Tax Act, 1961, you can claim a deduction on the premium paid towards your ULIP, up to a maximum of ₹1.5 lakh per financial year. This deduction is subject to certain conditions, such as the premium not exceeding 10% of the sum assured.
Taxation on Maturity Proceeds: The taxation of ULIP maturity proceeds depends on the date of policy issuance and the premium paid. For policies issued on or before 31st January 2021, maturity proceeds are generally tax-free under Section 10(10D), provided the premium paid in any year does not exceed 20% of the sum assured. However, if the premium exceeds this limit, the entire maturity proceeds become taxable.
For policies issued on or after 1st February 2021, maturity proceeds are tax-free if the annual premium paid for the entire policy term is less than ₹2.5 lakh. If the premium exceeds ₹2.5 lakh in any year, the excess amount is considered a deemed capital gain and taxed accordingly. The tax rate depends on the type of funds (equity or debt) and the holding period.
Taxation on Death Benefits: The death benefit received by the nominee under a ULIP is generally tax-free subject to conditions under Section 10(10D).
Conclusion
ULIPs offer a dual benefit. A part of your premium goes towards life coverage, while the remaining amount is invested in market-linked funds. This allows for potential wealth creation over time, making ULIPs attractive for individuals seeking both insurance and investment avenues. When this investment grows significantly, it can supplement your financial goals like retirement or child education. Using a ULIP calculator can help you determine the expected returns on your investments.