Even though returns from Mutual Funds seem very attractive, they need thorough research. Introducing ULIP, an investment plan that saves you this effort and offers you the dual benefit of wealth generation and life insurance.
Sample these scenarios. Mr. Pal decides to invest in mutual funds, aiming at high capital growth. But before he starts investing, he has to figure out his risk appetite, the tenure he should invest for, which would get him closer to his financial goals, just to name a few.
On the other hand, Mr. Krishnan decides to invest in a Unit Linked Insurance Plan (ULIP) after being clear about his financial goals and the sum assured that he is looking for. With this plan, he has not only invested in the capital market, he has also secured his family against unexpected emergencies with a life cover. Mr. Krishnan has made a smart decision to make the most of the power of compounding through a disciplined and systematic investment towards a ULIP.
Mr. Pal has his sights on a dream car, a plush sea-facing home and that oh-so-irresistible international getaway that he had been planning for ages. Mr. Krishnan has decided to go after all these dreams, without losing his sight on financially securing his family against unpredictable life situations.
Here are 11 points that make ULIPs a clear winner:
Insurance-cum-Investment – Both in One!
While mutual fund is a pure investment plan, a ULIP offers a wider horizon, being an insurance-cum-investment plan. This means that you not only grow your capital like the way you do in a mutual fund investment, but you also receive a comprehensive life cover. This cover will financially protect your family in the event of unforeseen eventualities during the term of the policy. For instance, if you take a ULIP with your child as your beneficiary, this plan will act as your child’s financial guardian in the case of your demise during the chosen policy term.
Tax Benefit on Annual Premium Amount
ULIPs are eligible for tax deductions of up to Rs.1.5 lakh under Section 80C of the Income Tax Act, 1961, on annual premium payments. Individuals and Hindu Undivided Families, both, can avail this tax benefit. ULIPs also attract tax benefits against premiums on add-on riders related to health benefits under Section 80D of the Income Tax Act, 1961. However, in the case of mutual fund investments, tax benefits under Section 80C can be availed only on ELSS Mutual Fund schemes.
For a life insurance ULIP policy, tax deductions under Section 10(10D) of the Income Tax Act, 1961 can be availed on annual premium amounts up to 10% of the pre-decided sum assured. The Maturity Benefit or the amount received on partial withdrawal is tax-free. Life insurance policies bought prior to 1st April, 2012, are eligible for tax deductions on premium payments up to 20% of the sum assured. Premium amount over and above this ratio is taxable, as per the tax slab relevant to you under the income from other sources of the Income Tax Act, 1961.
For Unit Linked Insurance Plans that are taken for the purpose of retirement, the commutation amount of 1/3rd of the fund value is tax free under Section 10(10A) of the Income Tax Act, 1961. In sharp contrast, there are no such tax exemptions available on investment returns from mutual funds.
Tax deductions and exemptions on ULIP do not end there! It also helps you save on Long Term Capital Gains (LTCG) – yet another benefit that is not applicable on mutual fund investments.
A Plan with a Better Coverage
Mutual Funds are pure investment tools. Whereas, a ULIP along with investment provides for insurance cover too. For ULIPs, an insurance cover starts from as low as a minimum of 10 times the annual premium. The maximum limit applicable on ULIPs is based on the discretion of the insurer.
Flexible and Safe Investment Plan
Mutual funds are highly specialized investment schemes, that is, each of them invests in a certain type of market cap or sector. For instance, equity mutual funds invest in stocks or shares or equity and equity-related instruments. In the event that a stock does not fetch the desired results, it will affect the mutual fund and investor directly. However, the same cannot be said for ULIPs because the investment funds are made with a combination of both equity and debt in varying proportions and a certain objective in mind. Being a flexible investment, fund managers of insurance companies can choose to invest in an extensive variety of funds that show the scope of generating maximum returns. This feature also makes ULIPs a safer investment option.
Flexible Switching Options between Funds
As investments in a ULIP are restricted to specific investment funds, asset classes and market caps switching options can be availed to make the most of the market conditions all throughout the investment cycle. This further safeguards ULIP investments against capital market risks, boosting performance. Mutual fund investments are not as flexible, once has to exit from one scheme completely and then make fresh entry in another scheme, thus emphasizing the versatility of ULIP plans yet again.
Affordable Fund Management Charges
Earlier, ULIP investments used to have high charges deductible from their premium payments or deducting units from the policyholders account or adjustment of Net Asset Value (NAV). These expenses are incurred as a part of fund allocation, fund management, premium redirection and switches, mortality charges, policy administrations and other miscellaneous charges. These charges were quite high till 2010. Now, these charges have been reduced drastically, due to which ULIP has become a more lucrative investment option than mutual funds. While fund management charges on ULIPs are 1.35%, the charges are fixed at 2.5% for mutual funds.
Lesser Cost & Ready Availability on Online Purchase
The increasing availability of ULIP policies online has further restricted the charges incurred during such investments. So, the good news is that you get to save or pay lesser on certain fees as compared to what it was before. These include premium allocation charges, fund management fees and policy administration charges. Smart plan, right?
Loyalty Benefits to Policyholders
The Loyalty Units feature for ULIPs makes policyholders eligible for additional units on maintaining a consistent record of timely premium payments over a long time. This feature does not hold true for mutual fund investments.
Additional Riders Available
ULIP, being an investment-cum-insurance plan, has the provision for add-on riders like Accidental Benefit and Critical Illness Benefit. These riders can be purchased along with ULIPs – a benefit that is not available with mutual fund investments.
Waiver of Premium Feature
The Waiver of Premium (WoP) feature which is one of the USPs under Child ULIPs, protects your child’s financial future from unforeseen emergencies like death (accidental or natural), certain illnesses and sudden lack of employment due to permanent disability, etc. The WOP feature ensures the dreams are fulfilled with the plan continuing for the agreed policy with active participation in the market and no obligation of future premium contributions. Mutual fund investments do not offer this benefit.
Fixed Lock-In Period for Forced Savings
The lock-in period of 5 years, as applicable on ULIP plans, ensures disciplined savings every month. It encourages ULIP policyholders to put aside a certain pre-determined amount every month, which otherwise feels like a challenge considering the constantly rising expenses. Not just that, the lock-in feature prevents the investor from withdrawing money before the completion of 5 years, enabling him/her to build a robust corpus over the long term. None of these features and benefits are applicable on mutual fund investments. So, a pure investment plan or an insurance-cum-investment plan – which side are you on? The choice is obvious, right???
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