How To Save Tax With Unit Linked Insurance Policies (ULIP)

What is ULIP?

Unit Linked Insurance Plans (ULIPs) are one of the most effective tax-saving investment instruments available today. It provides wealth growth as well as life insurance protection.

It’s rare to find an investing package that offers all of the advantages of a ULIP plan. The same 5-year lock-in term provides better returns than tax-saving fixed deposits, NSCs, and post office deposits. The best part is that not only may you deduct your ULIP subscription payments, but your maturity benefit is also tax-free. The minimum guaranteed amount granted by ULIP to the nominee in the event of the policyholder’s death is known as the sum assured.

Most people believe ULIPs to be an excellent investment option because they can provide better returns to policyholders. It can assist with important life goals such as a child’s higher education or retirement preparation. Additional ULIP tax benefits aid in the management of tax liabilities. It’s important to remember that ULIP has several drawbacks. Because a ULIP is a market-linked investment product, the fund’s performance is influenced by market conditions. It is up to the investor to assess their risk tolerance before proceeding with the transaction. The risk factor varies depending on the types of funds available for ULIP investing.

How does ULIP work?

When you invest in a ULIP, the insurance company invests a portion of the premium in stocks, bonds, and other investments, while the rest is used to provide insurance coverage. Fund managers in insurance firms manage the assets, so the investor is relieved of the burden of keeping track of their money. ULIPS allows you to swap your portfolio between debt and equity-based on your risk tolerance and market knowledge. Benefits like these, which give investors the ability to change, are a big part of why these investment products are so popular.

Lock-in-period of ULIP

In 2010, the Insurance Regulatory and Development Authority of India (IRDAI) increased the lock-in duration for ULIPs from three to five years. However, because insurance is a long-term investment, you may not reap the full benefits of the policy unless you hold it for the whole term, which can vary from 10 to 15 years.

Types of ULIPs

Funds that ULIPs invest in

• Equity Funds: These funds invest their premiums in the stock market, putting them at a higher risk.
• Balanced funds: Balanced funds are those in which the premium paid is split evenly between the debt and equity markets to reduce investors’ risk.
• Debt Funds: These funds invest the premium in debt securities, which have a lower risk and a lower return.

End-use of Funds

• Retirement Planning: For those of you who want to save for your golden years while still working.
• Child Education: You can save for your child’s education or any unexpected emergencies by investing with a long-term goal of saving.
• Wealth Creation: You can invest to establish a substantial fund that you can use for a future financial goal.

Death benefit to Policy Holders

• Type I ULIP: In the event of the policyholder’s death, the higher the insured sum value or the fund value is paid to the nominee.
• Type II ULIP: In the policyholder’s death, the Type II ULIP pays the insured sum value plus the fund value to the nominee.

Benefits of ULIPs

• One of the significant characteristics of ULIPs is life insurance. Life insurance is included with the investment. The sum promised will be delivered to the investor’s family in the event of the policyholder’s unexpected death.
• Investors obtain rider options under extra coverage in addition to life insurance. Accidental death rider, critical illness rider, and term rider benefits are available to investors as rider choices.
• A tax deduction is available for ULIP premiums paid under Section 80C. In addition, under Section 10(10D) of the Income-tax Act, the returns from the policy upon maturity are tax-free. This coverage has a twofold benefit that you can take advantage of.
• The benefits of investing in this instrument, however, do not end there. Investors who invest in unit-linked products can save money on taxes on their withdrawals.
• When learning about the lock-in period, it’s easily mistaken for ULIP for short-term insurance. However, this is not the case; rather, it implies that an investor’s financial objectives are long-term. Because the money is compounded, the net returns from this scheme are usually more significant. As a result, the rewards are greater even if the investor decides to depart after the lock-in period.
• According to the investor’s goals and market swings, they can swap between equity and debt funds. Additionally, the investor can make partial withdrawals. However, the terms and restrictions vary for each firm. Top-ups are a feature of ULIPs that allows policyholders to increase their premium payments.