Before jumping upon finding the best ULIP plan we must understand what ULIPs are and how they work?

ULIP or unit-linked insurance plans are the insurance cum investment plans which provide risk cover to the investors along with the benefit of investments. In ULIPS a part of your premium is basically utilized for providing insurance cover while the rest of the premium is invested in equities, government securities or debt based on the options you choose.

ULIPs generally offer four kinds of fund options to choose from:-

• Growth fund - They primarily invest in equities and have a higher risk and generate higher returns.
• Balanced fund - They invest in a mix of debt and equity and have a lower risk.
• Debt fund - They invest primarily in corporate bonds, commercial papers, etc.
• Gilt fund - These funds invest most of their assets in government securities.

Benefits of Investing in ULIPs

• Risk coverage ULIP provides an insurance cover which extends death benefits to the investors. They generally charge mortality charges for providing an insurance cover.
• Wealth creation over a period of time ULIPs create wealth for its investors over a long duration as they invest a part of the premium in various investment avenues like equities, debt and government securities.
• Tax benefits The premium paid towards ULIP qualifies for tax deduction under sec 80C up to a limit of Rs 150000. Also, the maturity amount is exempted from tax under sec 10(10 D) as ULIPS are insurance products.
• Flexibility in switching between funds ULIPs allow investors to make any number of switches between the different fund options available. Generally, they allow four free switches in a year. For eg, an investor may move from growth fund to balanced fund or gilt fund or vice versa. The best part about ULIPs is that the switching between funds does not bring any tax liability on the investor.

Is ULIP a good investment?

ULIP is a perfectly blended product which offers both investment and insurance to the investors. An investor will be better off if he invests in ULIPs rather than in traditional insurance plans like endowment plans or money back plans. Since ULIP invests a part of the premium in debt and equity shares, therefore they are capable of generating higher returns which is not possible in case of traditional plans.

Which fund option is best for ULIP?

ULIPs generally offer various kinds of fund options which one may choose based on their risk profile. An aggressive investor may choose a growth fund while a conservative investor may choose debt or gilt fund. So if you are among those who want to earn higher returns and can take some risk then you can go for growth fund option.

Is ULIP better than FD?

We have made a brief comparison between the two based on certain parameters:-

• Return- Fixed deposits offered by commercial banks provide a fixed rate of return which is decided in advance for a particular duration. While on the other hand in case of ULIPs, the returns are market-linked and not assured. And hence there are more chances of earning higher returns in case of ULIPs.
• Taxability- The interest income earned from FD's is fully taxable in the hands of investors while on the other hand since ULIPs are the insurance products the maturity amount is fully tax-free.
• Risk cover - ULIPs provide you with an insurance cover while FD's don't, which makes ULIPs a perfect saving instrument which at the same time provide risk cover to the investors.

FAQ'S

Q. Is there any lock-in period for ULIP?

A. Yes, there is a lock-in period of a minimum of 5 years in ULIP.

Q. When am I eligible for claiming tax deductions in case of ULIP?

A. You can claim tax deductions up to a limit of Rs 1.5 lacs, only if your premium is less than 10% of the sum assured. For e.g. If the sum assured is Rs 10 lacs and the premium to be paid is Rs 90000 then you can claim this whole amount as a deduction. However, if the premium exceeds Rs 1 lac then you can claim only 10% of the premium as a deduction.

Q. Does maturity amount always exempted in case of ULIPs and if yes what is the maximum exempted limit?

A. The maturity amount is exempted from tax, only if the premium paid is less than 10% of sum assured. If you satisfy this condition then the whole maturity amount is exempted from tax.

Q. Which is the best ULIP plan?

A. There are many ULIP plans available in the market. To name a few ones can go for ULIPs offered by UTI mutual fund. This is suitable for those who want a life cover and want to create wealth over a period of time along with the bonus option. The charges one has to pay in this fund is very low in comparison to other ULIP plans.

Further Reading:

www.mutualfundssahihai.com

www.amfiindia.com