Plan Your Taxes- FAQs On ULIP (unit linked insurance plan)

A ULIP is a market-linked insurance plan, wherein premiums are invested in stock markets in addition to corporate bonds and government securities. Whereas in the conventional insurance plans, premium is invested primarily in risk-free instruments like government securities, AAA rated corporate paper. Please find below some FAQs on ULIP:

What are the Tax Benefits?

Investment in ULIP brings in Tax Benefit. The amount can be claimed under sec 80C up to the limit of Rs. 100000. Further, in the Direct Tax code (DTC) regime, the investment in ULIPs will be restricted to Rs. 50,000.

Why one should opt for ULIP?

In comparison to PPF/KVP/NSC where returns range to an average of 8% ULIP’s average return is seen to be little higher.

The returns from ULIP are tax free except ‘Pension Plans’ , whereas returns from FD, NSC, Bonds etc are subject to tax.

ULIP is dynamic in nature. The investor gets insurance cover along with the investment in the market units. There are a number of plans which gives fund value plus risk cover in case of death. You get the dual satisfaction of insurance cum investment with the little extra you pay. Further, ULIP is driven by the daily NAV, and are under the control of experienced professionals of the field.
The investor can extract the maximum out of the market with the freedom to invest in diversified units unlike investing directly in equities.

Is ULIP the Best?

When your priority is not insurance, or when you are sufficiently insured, you will find ELSS (Equity Linked Saving Scheme) more rewarding. Because ULIP has high mortality charges and this may reduce your liquid funds. The commission charged in ULIP is also higher in ULIP

When one has limited funds to invest, financial security becomes his priority. In such case Term Insurance is better than ULIP and even ELSS because with varying needs one cannot commit for the long term.

ULIP in the Direct Tax Code (DTC)

The lock in period has been raised from 3 to 5 years. Further, pre mature withdrawals will become taxable with the DTC.

Once DTC comes into force, the maturity proceeds will be taxable if the annual premium is less than 5% of the sum assured, which is now 20%, hence more risk cover will be included which will reduce the returns.

Avoid ULIP –

If you do not want to get exposed to market risk PPF/NSC/KVP would be a better option where a fixed return is guaranteed.

Further its noteworthy that the investment in ULIP saves taxes only to the overall limit of Rs. 100000 under Sec 80C. If other investment already covers up your limit, ULIP won’t be any more rewarding for you.
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