What is ULIP
A ULIP is an insurance plan where the premium paid is invested in equity, debt, or money market instruments. Subject to certain conditions, the premium paid towards this policy is allowed as a deduction u/s 80C of the Income Tax Act. So, ULIP premiums can be deducted from your taxable income up to the permissible limit u/s 80C.
The only condition is that the premium amount should be less than 10% of the sum assured under the ULIP. So, if the sum assured is Rs. 15 lacs and the premium paid is less than Rs. 1.5 lacs, then the entire amount can be claimed as deduction u/s 80C assuming upper cap is 1.5 lacs. If the premium is more than 10%, say Rs. 2 lacs for sum assured of Rs. 15 lacs, then the deduction amount is capped at 10% i.e. Rs. 1.5 lacs.
ULIPs also offer fantastic tax savings on withdrawals that are unavailable to mutual fund investors. Withdrawals may occur in the following instances:
- Death of the policy holder
- Maturity of the policy
- Partial withdrawal at the discretion of the policy holder
Death benefit paid under the ULIP is completely tax free. In this respect, the ULIP resembles a traditional life plan.
Upon maturity of the ULIP, the policy holder will receive the assured benefit or the value of the unit-linked investments whichever is higher. This payout is exempt u/s 10(10D) of the Income Tax Act. This is a significant difference between ULIPs and mutual funds as the income earned from the latter is fully taxable.
ULIPs have a minimum lock-in period of five years. The policy holder is permitted to make partial withdrawals after this. This feature allows individuals to use ULIPs for goal-centric planning. You can use ULIP investments to plan for significant milestones like marriage, home purchase, education or marriage of your children. Versatile investment options allow you to mitigate the negative impact of inflation and benefit from the economic development of the country. Combining equity with debt will allow you to manage your risk profile depending on your age, current income, and other factors.
Servicing A Unit Linked Plan
- Single Premium : The policy holder is required to pay the entire premium amount as a lump sum at the beginning of the policy term.
- Regular Premium Payment (annually, semi-annually or monthly) : The policy holder has to pay the pre-determined premium amount periodically i.e. annually, semi annually or monthly, depending upon the premium payment term opted for.
- Number of Premium Paying Years : This depends on the term of the policy that you have chosen. In most cases, the policy term and the number of premium paying years (in case of regular premiums) are the same. However, some policies give the insured the option of choosing the number of premium paying years.
The following charges may be deducted from your policy towards the cost of benefits and administration services
- Administration charges : A fee is charged for administration of your policy every month. Administration charges are deducted by cancelling units proportionately from each of the funds you have chosen.
- Fund management charges : These charges are towards meeting expenses related to managing the fund. This is charged as a percentage of the fund’s value and is deducted before arriving at the net asset value of the fund.
- Switch charges : You can switch between the funds available to suit your changing needs and goals. In a policy year, a fixed number of such switches are available free of cost. Subsequent to this, each switch would attract a certain charge. These charges are deducted by cancelling units proportionately from each of the funds you have chosen.
- Surrender charges : These charges are levied for premature encashment of units. They are charged as a percentage of the fund value and depend on the policy year in which the policy has been surrendered.
- Mortality Charges : Depending upon the age, and the amount of cover, these charges are levied towards providing a death cover to the insured.
- Premium Allocation Charge : This charge is deducted as a fixed percentage of the premium received, and is usually charged at a higher rate in the initial years of a policy. This charge varies depending upon whether the policy is a single premium plan or regular premium policy, the size of the premium, premium frequency and payment mode.
- Partial Withdrawal Charges : Lump sum withdrawals are allowed from the fund after the lapse of certain years of the policy term and subject to pre- specified conditions. However, such withdrawals attract charges, as mentioned in the respective policy brochures.
You may also make partial withdrawals from your funds after a certain specified period, subject to a partial withdrawal charge. The withdrawal amount should be at least the minimum prescribed withdrawal amount and the fund must not fall below the minimum fund value after the withdrawal. You can make a full withdrawal of your policy before its maturity date. However, surrender charges will be applicable in this case.
ULIP allows the policy holder to choose his or her preferred asset class. A young individual with high risk tolerance can opt for a high-risk high-return strategy of investing primarily in equities. Or, one can opt for a combination of equity, debt, and money market investments to enjoy high returns with minimal risks.
A ULIP investor can also switch from one asset class to another or modify the proportion in which funds are invested in equity, debt, and money market instruments. This allows the investor to benefit from market upturns and escape market downturns, to ensure the greatest chance of steady wealth appreciation. A mutual fund, on the other hand, has a pre-determined allocation strategy that cannot be modified, which can limit flexibility. While traditional insurance plans offer 4% to 6% returns, ULIP can offer you double digit returns if you are invested in equity funds.