Unit Linked Insurance Plans (ULIP) is a popular plan with high patronage in India. These plans provide the much-needed investment at the same time covering the risks. The investment returns in these plans are high, thereby giving the customers a chance to maximize their wealth.
An Introduction to ULIP Plans
In a ULIP plan, the investor has an opportunity to invest to invest in areas such as bonds, stocks and as well as mutual funds. Depending on the specific requirements of the investor, this plan provides long-term investment as well as protection. Both the entities of the plan can be managed as per the preferences of the customer.
In a ULIP plan, a customer pays an amount (premium) to invest in it. There will be several customers interested in investing in a portfolio. The insurance company pools the money from all customers and invests in the type of fund chosen by them after deducting the expenses. The most commonly invested funds include equity, debt or balanced funds.
Based on the money invested, every investor is allocated a unit, which is also known as the Net Asset Value (NAV). The value of NAV always depends on the markets. They rise and fall based on the market performances. The total value of the NAV at the time of maturity of the depending on the market is handed over to the customer.
Who is ULIP Best Suited For?
ULIPplans can be purchased by any Indian citizen above 18 years of age. However, only certain individuals will be able to reap the most benefits out of it. ULIP plans are most suitable for:
- Customers who can follow their investment portfolio closely and manage them carefully
- Investors who can keep their investment going for a long-term or medium term
- Investors who are averse to taking risks and who have a high capacity to take risks.
- Customers in their middle age with limited liabilities and different financial requirements.
How Can You Save Tax with ULIP Plans?
ULIP plans have good returns, protection and tax savings all combined in a single product that can create wealth over time. The unique features of a ULIP plan are:
- Allows investment of premium in debt funds and equity funds with different proportions
- Allows switches between funds (i.e), inter-fund transfers
- No tax liability
Here are a few pointers How ULIP Plans Help you save tax.
i. The Premiums paid are deductible
The premiums paid towards a ULIP fund are invested in various money market instruments. The premium paid towards a ULIP policy is eligible for deductions as per Section 80C of Income Tax Act to the limit of up to Rs 1.5 lakhs.
There are certain conditions that govern this clause and the most important one is that the premium paid towards the ULIP plan should be lesser than ten percent of the total sum assured under the plan.
ii. Freedom to choose the asset class
Any investor of a ULIP plan can change from one asset form to another. Certain modifications of the units invested in each asset are also permissible. With this, the investor can benefit when the market soars and can stay away from risks when the markets crash. This ability to modify makes this plan a key low-risk investment.
iii. The withdrawals are not taxed
ULIP plans also offer excellent tax savings when the consumer withdraws. Here are a few instances when withdrawals can be made and how they help save tax:
- Withdrawals can be made on the death of the policyholder. This death benefit is totally free of tax.
- On maturity of the ULIP plan, payouts are made. This amount is tax exempt under Section 10D of the Income Tax Act
iv. Ability to Top-up investments
A ULIP policyholder can invest more cash into the plan with regular top-ups. This top-up amount is eligible for deductions under Section 80C of the IT Act and can also be exempted under Section 10D. A condition of this clause is that the premium should not exceed 10% of the total sum assured under the ULIP plan.
How is a ULIP Plan Ideal For People Under 45 Years Of Age?
Apart from the tax deduction benefits, ULIP plans help investors under the age of 45 earn great returns. Here are a few reasons how:
I. Good returns and tax savings on equity funds
With a ULIP plan, an investor can invest in a range of equity funds. As per the data from the last five years, these funds have given the best returns. There is also an added benefit of tax savings as per Section 80C that is not possible with any other investment in this asset class.
II. Different modes of payment
Below the age of 45 is the time when an individual experiments and changes his/her financial planning. To ease the burden, ULIP plans give two options namely monthly payment and annual payment.
III. Maturity benefits
Only ULIP plans provide tax benefits on maturity withdrawal. This is not possible with any other investment method that helps invest in depth and balanced funds.
IV. Good life cover
The life cover as a part of this plan is ideal for those beginning their professional career or half-way through their career. The wealth returns combined with life cover makes this plan ideal for youngsters and middle-aged people.
V. Long-term investment
With a five-year lock-in period, ULIP plans are ideal long-term investment tools. With good returns over a long-term and added tax benefits, these plans are the ideal investment tools offering life cover that are perfect for those under the age of 45.