ULIP

This Gudi Padwa, Develop a Habit of Creating Wealth

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Gudi Padwa, is around the corner. It marks the arrival of spring and a renewal of life. This auspicious occasion is traditionally considered the perfect time for new beginnings – be it starting a new business or developing a good habit. If you have not yet developed a habit of making regular investments, this is a great time to do so. Begin this new year with making disciplined wealth creation choices.

But why Save with ULIP?

Making a regular savings in a ULIP is a great idea as it combines the benefits of insurance and savings. It provides you with financial protection while also delivering a healthy return. They impose discipline and facilitate long-term systematic savings as they have a five-year lock-in period. This is great for anyone who tends to splurge on impulse purchases and dip into their savings frequently. Remember that building wealth requires sustained regular savings that allow returns to compound over the years.

How does ULIP work?

A part of the premium paid towards ULIP is used to cover the risk to your life. The rest is pooled by the insurer and invested in the funds of your choice. The total corpus is then divided into “units” and each investor is allotted units based on the amount they have invested. Each unit has a Net Asset Value which changes according to the market value of the underlying funds. The value of your ULIP is equal to the product of the number of units allotted to you and the NAV.

Key benefits of ULIP

ULIP offers you three main benefits:

  1. Death benefit: ensures that your family faces no financial hardship even if you are not around
  2. Maturity benefit: the value of your investments paid at maturity of the policy
  3. Tax benefit: exception under various sections of the Income Tax Act

Other features that make ULIP ideal for a new investor include:

  1. Flexibility: In a ULIP plan, you can customize each aspect of the product to meet your specific requirements. For example:
    1. You can choose the sum assured for the life cover based on your future liabilities and financial capabilities
    2. Choose the total premium to be paid based on how much you can invest without stretching yourself thin. You can use a top-up facility whenever you have some extra money to invest
    3. Opt for insurance riders to extend the insurance coverage to cover any risks you may face.
    4. Choose the fund type.  You can opt for anything from aggressive equity funds to more conservative money market funds and fixed interest debt funds.
  2. Transparency

You get a clear view into where your money is invested, and the current value of your investments. Further, a free look-up period allows you to be sure that the ULIP you have purchased is in line with your original expectations without having to worry about being locked into the product.

  1. Liquidity

After an initial lock-in period, ULIP allows you to make sell the units allotted to you to make a full or partial withdrawal. This allows you to meet any unforeseen expenses that may crop up in the future.

  1. Multiple benefits from a single scheme

ULIP offers not just insurance cover but also an avenue to grow your investment over the years.

  1. Risk mitigation

As the funds from multiple investors are pooled to together, the fund manager can diversify the investments even if your own investment is a small one. This reduces the risk exposure and allows you to reap benefits from market growth without worrying about timing the market or picking the right stock.

Tax benefits on ULIP

Funds invested in ULIP can be claimed as deduction under both Section 80C (life insurance) or Section 80CCC (pension). This deduction should be lower of your annual premium and 10% of the sum assured. Remember that this is subject to the overall ceiling of ₹1,50,000 on deductions offered under Section 80C/80CCC/80CCD(1). It is important to remember that the deduction under 80C is only available if the policy is in force for at least two years.

Further, any benefits you receive on maturity or any partial withdrawals made from the plan are tax-exempt under Section 10(10D). This exception is available only of the annual premium is less than 10% of the sum assured – which is almost always the case.  Further, if you choose to commute your policy into an annuity, the commutation is tax-free under section 10(10A) of the income tax act.

It is also important to remember that while with the abolition of dividend distribution tax, the dividend returns from equity funds are now taxable in the hands of the investor. No such tax is applied on the returns generated from ULIP, even though they may also invest in a similar underlying equity fund. Further, returns earned though ULIP does not attract long-term capital gain tax.

Charges involved

When investing in ULIPs, be aware of the following charges

  1. Premium allocation charge: fixed percentage of the premium charged whenever premium is paid
  2. Mortality charge: charged on a periodic basis, based on the total sum assured and the age of insured
  3. Fund management charge: a maximum of 1.35% per annum deducted daily
  4. Policy administration charge: charged on a periodic basis, could be fixed or percentage of fund value
  5. Partial withdrawal charge: a flat fee charged on a relevant transaction
  6. Fund switching charge: a flat fee charged on a relevant transaction
  7. Premium redirection charge: a flat fee charged on a relevant transaction
  8. Premium discontinuance/ policy surrender charge: a flat fee charged on a relevant transaction

Depending upon the policy you opt for many of the charges may be waived off for a given number of transactions. For example, your policy may offer unlimited fund switching or may allow a set number of free withdrawals in a year.

This Gudi Padwa, make a resolution to build wealth for your family through regular investments and protect them from any unforeseen circumstances through the insurance cover offered by ULIP.

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