It’s that time of the year again when insurance agents start crawling out of the woodwork, insisting that you purchase a Unit Linked Insurance Plan (ULIP) and that it’s the best investment that you can make to save tax, and that you must absolutely sign on the dotted line before March 31.
I dislike ULIPs, but that is also because of how aggressively they’re marketed by agents, who get additionally aggressive with their women customers because they know that women have a harder time saying no under pressure. This year, they’ve become especially belligerent because of the new LTCG tax on equity instruments like Equity Oriented Mutual Funds and Equity Shares.
The question here is – does this tax make ULIPs a worthwhile investment in comparison to Mutual Funds?
But First, what are ULIPs?
A ULIP, or a Unit Linked Insurance Plan is an insurance policy and investment, rolled into one. The policies are designed for the long term and usually for a minimum of 10 years and can go on up to 20, 25 years. When you buy a ULIP, you pay a premium every year or every month for this period (or a part of this period). For example, you might only be required to pay premium for 7 years in a 10-year policy. During this time, you will have a ‘life cover’, that is, in case you die, your legal heir will receive an assured amount (which will also be the bare minimum that you will receive on maturity). At the end of the tenure, you will receive the money that you had originally invested as premium, along with a terminal bonus (that is not assured, by the way), that varies from policy to policy.
So, are ULIPs are more worthwhile investment than Mutual Funds?
When it comes to the matter of taxation, ULIPs do have an advantage. Any income or money received on maturity from ULIPs are tax-free, whereas the proceeds of Mutual Funds are not. ULIP instalments are also tax deductible under section 80C.
Short term gains from Mutual Funds are taxed at 15% and long-term gains in the excess of Rs. 1 lakh from the sale of Mutual Fund units that have been held for more than one year will attract 10% LTCG tax if they are equity oriented. 20% LTCG tax will apply to debt-oriented funds irrespective of the amount of gain. However, bear in mind that there are two components to a ULIP payment – premium and investment. The premium component is chargeable to GST, so there is a tax that you will end up paying.
The great thing about Mutual Funds is that every detail about them is available online, so you can do your research as thoroughly as you’d like. ULIPs work similarly, in the sense that they invest money on your behalf in varied securities, but there is little to no information available about them and the returns they offer, so trying to find the best ULIP for you can be difficult.
Easy In, Easy Out
With the exception of Equity Linked Savings Schemes that have a compulsory lock-in period, Mutual Funds are easy to redeem and you can do so online with simple tools. ULIPs on the other hand, are nearly impossible to redeem before the lock-in period, and if you want to redeem them before they mature, they will suffer penalties which may result in you not receiving even the amount you received in full. So, if you really need funds for emergencies, you should not be thinking about ULIPs.
Do remember that purchasing a simple term life insurance will get you the same life cover at a fraction of the cost and that you can invest separately in Mutual Funds. ULIPs are also a commitment that you must honour through the policy period, whereas you can pause SIPs at any time.
So, are ULIPs for you?
There are a number of ULIPs in the market for different purposes – there are ULIPs designed to help you save for your child’s education, your retirement and so on. If you don’t have enough PF or Life Insurance premium or a housing loan instalments to cover tax deductions under 80C, you can consider a ULIP. If you don’t, then they’re not particularly attractive instruments. So, if you’re being hounded by an insurance agent, put forth your questions, clarify all your queries and if you believe that a ULIP won’t suit your needs, don’t agree to purchase one. Knowledge of finance is important for women, but learning to say no, is the most important.