The tax season comes every year, and we all start running hastily to save tax through different investment options. While tax-saving is one of the most important investment decisions that should be made at the start of the financial year, most people delay it until the taxman knocks at our doors to collect the dues. A good tax-saving instrument should give adequate tax benefits and yield good returns over time. While investment options, such as bank FDs, PPF, and NSC, help with tax saving, investing in Unit-Linked Insurance Plans or ULIPs is smarter. Besides offering tax benefits of up to Rs 1.5 lakhs, ULIPs help grow your money over time. In fact, in the past year, a large part of the premiums of private insurers has come from ULIP policies. The largest private insurer, ICICI Prudential Life Insurance, had 85% of its net premiums from ULIP in 2015, compared to 66% in 2014. (Source: The Economic Times)
We all work hard to give our loved ones a secure and comfortable life. However, we won’t achieve this objective without taking any action from our side. We must understand that investing regularly is not only about putting cash aside for your rainy days. Investing is about making your money grow over the years by choosing the right investment options per your needs. A ULIP is a long-term investment option that allows wealth creation at market-linked rates. Further, in case of your sudden demise, the insurance company pays the family death benefits so they continue to lead a comfortable life as you always wanted for them.
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To elaborate, ULIPs allow you to:
· Switch funds according to market condition: You can switch between options to protect your investment from market volatility. If the market slows, you can switch your funds from equity to debt, a safer option. Most of the insurers offer 10-15 free switches in a year. This facility is not available in any other financial instrument.
· Secure funds for important life milestones: You may need funds at life’s different stages, such as a child’s education, marriage, and business venture. The partial withdrawal facility of ULIPs helps you to get your money at important life stages.
· Goal-oriented investment: With the help of ULIP, you can invest to achieve your life goals, such as a child’s education, marriage, and retirement. For purposes that need to be completed shortly, say 2 or 3 years, investment in debt funds of ULIPs would be a correct choice. Further, for those goals that will arise beyond 7 or 10 years, you can invest in equity funds of ULIPs.
Getting over the ULIP aversion
Due to the high charges, ULIPs were unpopular amongst investors, forcing a sequence of reformatory actions. But the good news is that these investment plus insurance plans have again become popular amongst investors as they have been revised into a highly cost-effective option, with some levying charges even lower than few mutual funds. Also, the Insurance Regulatory and Development Authority of India (IRDAI)tightened measures in 2010, capping the annualized costs of ULIPs at 2.25% for the first ten years of holding. Certain insurance companies have further reduced prices to be at par with other competing products like mutual funds.
Getting the tax advantage
Besides the low charges of ULIPs, the key benefit they offer is the easy and tax-free transfer from debt to equity and vice versa. Mutual fund holders need to pay tax on the short- and long-term gains made on the fund while switching, but amounts are tax-free with ULIP’s increases and maturity. But to avail of this benefit, one must opt for a sum assured at ten times or more than the yearly premium amount.
Why invest in a ULIP?
Though a ULIP plan may not be for everyone, especially those interested only in investment, it has become a rather popular option among certain people interested in its dual benefit. Moreover, since the 2010 IRDA guidelines have assured that the combined charge of a ULIP cannot exceed 2.25% per year for the first ten years, the fund management fee cannot surpass 1.35% per year, making it an excellent cost-effective option for investors.
There are a few things you need to know before investing in a ULIP –
· While ULIPs provide life cover, the amount of lifethe annual premium, which is not high enough if the objective is to secure one’s life. When investing in a ULIP, the live coverage is only an added benefit.
· The Lock-in period for ULIPs is five years to help get the best out of the product; ideally, keeping it for 10-15 years helps reap high benefits.
· ULIPs come with a feature called “partial withdrawals.” This means that you can take out some portion of your invested money should you need it without coming out of your investment completely.
Considering its revised low charges and tax-free nature, ULIP is gaining popularity asthe long-term instrument. It gives you a certain amount of life cover and good returns. Hence, it is an instrument for someone looking for a long-term investment that offers some insurance.