Every investment plan has both merits and demerits. The same applies to ULIP as well. This is a life insurance plan. Through this you can earn along with a life insurance cover. You can also take advantage of tax saving. The lock-in period of investment in ULIP is five years. Until a few years ago, huge charges were levied in ULIPs but the cost of new ULIPs has reduced considerably and they are being called smart ULIPs.
The biggest advantage of Smart ULIP is the facility to pay the premium as per the changing financial circumstances. You can choose the option of quarterly, half yearly, yearly or monthly investment just like SIP of mutual fund. If you have surplus funds then you can also top up. In this investment, according to the risk tolerance, one can choose to invest up to 100 percent in equity or debt. As per your strategy you can switch to equity, debt or hybrid. Some insurance companies do not charge for switching funds. After five years, you can withdraw a part or all of your investment.
The special aspect is that in Smart ULIP there is no premium allocation and policy administration charge, which earlier used to be deducted from the premium of the insured. This way the cost of investing in new ULIPs has reduced to a great extent. The main difference between traditional ULIP and Smart ULIP is the flexibility in their investment strategies and premium payment.
The biggest drawback of the old ULIP was the high cost of investment. At one point, up to 40 percent commission was given to the insurance agent for ULIP in the first year, which was deducted from the premium of the insured. However, now the insurance regulator IRDAI has fixed the limit on ULIP commission. Now every insurance company decides the agent commission according to the size and expenses of its business. Still, this investment is quite expensive because the cost of running the plan and the cost of agent commission are included in the premium of ULIP.
In Smart ULIP, companies have abolished agent commission and premium allocation charges. Most of the insurance companies are selling this plan online. Due to this, some companies have reduced the policy administration charge and some have completely abolished it.
The cost of life insurance coverage in ULIP premiums proves to be quite expensive. In the new ULIP, insurance companies are giving the option of refunding the mortality charge. For example, HDFC Click2 Wealth offers the option of Return of Mortality Charge (ROMC) at the time of maturity, while Tata ISIP plan offers the option of Return of Mortality Charge (ROMC) in the 11th year. In ULIP, the insurance company take fund management charges which can be between 0.8 to 1.35 percent annually. This way, this investment has become economical to a great extent as compared to before.
Now let us know how to get tax benefits in ULIP? Under Section 80C of the Income Tax Act, tax exemption is available on investment up to Rs 1.5 lakh annually in ULIP. However, this benefit will be available only when the amount of investment is up to 10 percent of the amount of insurance cover. If the premium is more than this, there will be no tax benefit. If your total annual investment in ULIP is up to Rs 2.5 lakh, then the entire amount will be tax free on maturity after five years. If the annual investment is more than Rs 2.5 lakh then the returns on the over and above amount will be taxable.
SEBI Registered Investment Advisor Jitendra Solanki says that ULIP provides the benefits of life insurance cover, returns and tax benefits. Considering these features, ULIP seems to be a better option for investment but the investor does not get the facility of life cover for free. The company charges annually for this. This way your entire money is not invested. This is a major source of income for insurance companies. In ULIP, your investment and insurance gets mixed, which is not considered good under any circumstance. For insurance, take term insurance and choose the investment option according to your investment goals.
Know one thing very well that no insurance company will provide you any facility for free. This mantra also applies to Smart ULIP…so take investment decisions only after careful consideration.
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