If you are looking to create wealth, while also having a financial safety net in place, then a unit linked insurance plan or ULIP is the most suitable option. ULIPs give users the dual benefit of saving for different life stage goals along with a life insurance cover.
The portion that gets invested into a fund can be in equity instruments, debt instruments or both, depending on what the financial goals for investing are. These goals can be children’s education, retirement planning, wealth creation, etc. The other advantage of investing in ULIP plans is the tax advantage it offers. In this article, we shed some light on both - the types of ULIPs in the market and the tax benefits that can be availed through them.
Types of ULIPs
On the basis of death benefits paid out - Type I vs. Type II
ULIP plans can be classified into two categories on the basis of the death benefits they pay out - Type I and Type II.
Type I ULIP - In the event of demise of the life assured, the insurance company will pay the higher of fund value or sum assured to the nominee or beneficiary. To understand how Type I ULIP works, consider this example - Ishaan has availed a ULIP plan whose sum assured is Rs. 20 lakhs. It has, however, only accumulated a corpus of Rs. 9 lakhs in a span of three policy years. Should Ishaan pass away in the fourth policy year, his family stands to receive a sum assured of Rs. 20 lakhs, since it is greater than the fund value.
Type II ULIP - In the event of the demise of the life assured, the insurance company pays the sum assured value plus the fund value to the nominee. Following the above example, where the sum assured is Rs. 20 lakhs and fund value is Rs. 9 lakhs, Ishaan’s family stands to receive Rs. 29 lakhs in the event he passes away. The premium for plans under Type II ULIP is higher than that of Type I ULIP, given that the benefits received under the former is higher.
On the basis of premium payment - Single premium vs. Regular premium ULIP plans
Single premium unit linked insurance plan - An individual gets coverage for the full term by paying the entire premium amount in one go. The advantage of choosing this route is that the individual does not have to keep a note of the due dates. The plan will continue for the entire period for which it has been availed without any hindrances. The drawback, however, is with the tax angle - tax deduction under Section 80C can only be claimed for the year in which the lump sum premium has been paid. The policyholder will also need to ensure that the cover is at least 10 times the annual premium to be eligible for income tax benefits.
Regular premium unit linked insurance plan – Here, an individual can pay premiums in intervals, like monthly, quarterly, half-yearly or annually. One of the many benefits of this premium payment route is that it gives the investor the advantage of rupee cost averaging. If one decides to go with a regular premium ULIP plan, the individual must always ensure that the payments are made on time, otherwise the policy risks lapsing.
Tax Benefits on ULIPs
Since ULIPs have the element of life insurance cover, tax deductions can be claimed on the premiums paid under Section 80C of the Income Tax Act, 1961. One can save tax of up to Rs 47,668* u/s 80C with ULIPs by investing Rs. 1,50,000. The tax deduction available is up to 10% of the sum assured or annual premium, whichever is lower, subject to a maximum limit of Rs. 1,50,000.
The second form of tax advantage that ULIPs have to offer can be found under Section 10(10D) of the Income Tax Act, 1961. The amount paid out on the policy's maturity is tax-free in the hands of the receiver. This factor majorly sets apart ULIPs from mutual funds as the income earned from the latter is taxable. Taxes are levied on the capital gains for both equity and debt mutual funds.
Why choose ULIPs?
Unit linked insurance plans can be regarded as a hybrid product, given that they provide a life insurance cover, and, at the same time, help channel one's savings into different market-linked assets for achieving long-term goals. These goals could be funding a child's education or marriage, saving for retirement, etc. While saving for these goals, one also needs to ensure financial protection, and ULIPs help facilitate both.
Read on to know the types of ULIPs and the tax benefits associated with each of them.
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