Ulips Gives Better Tax Benefits than Mutual Funds

 

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For long Ulips were hated among all life insurance products. Life  Insurance agents mis-sold the Ulips to such an extent that they threatened the very existence of the Life insurance sector.

Reforms were introduced by IRDA in September 2010 to improve Ulips and save them. But the damage had been done.

Many investors are still reluctant to invest in Ulips due to the bad experience they had with them.

Ulips have reduced their charges particularly premium allocation charges which were over 30% of the premiums you paid. They are now around 7-8% of the premiums you pay.

Though mutual funds have a much lesser charge (entry and exit loads) Ulips too have become cheaper.

Where Ulips scores over mutual funds are tax benefits….

How are mutual funds taxed?

If you invest in an equity mutual fund for a time period less than a year and you make a profit, the gains are called short term capital gains.

These are taxed at 15% .If you stay invested in the equity mutual fund for over a year, your gains are long term capital gains and there is no tax on this.

If you invest in a debt mutual fund for a time period less than 3 years the gains you get are called short term capital gains. 

These gains are added to your taxable salary, and you are taxed as per the income tax slab you fall under.

If you invest in a debt mutual fund for a time period more than 3 years the gains you get are called long term capital gains. Long term capital gains are taxed at 20% with indexation.

What about the taxation of Ulips: 

Ulips are of different types:

• Equity
• Debt
• Mix (Equity + debt)

You can easily switch between Ulips. You can switch from an equity ulip to a debt ulip and vice versa. You can do the same in mutual funds also.

The money you invest in a Ulip is tax deductible up to INR 1.5 Lakhs under Section 80 C of the income tax act.

The maturity benefits are tax free under Section 10(10d). This means you don’t have to pay tax when you switch between equity Ulips to debt Ulips.

If you switch between an equity mutual fund to a debt mutual fund and vice versa you would have to pay tax on your short term and long term capital gains as applicable. There are no tax benefits on mutual funds baring ELSS.

There is no tax charged on the gains you make by switching from a debt to an equity ulip and vice versa.

Switching of funds is very useful for asset allocation .If the stock market’s rise your equity ulip may go up in value. You can shift a part of it to debt and balance your portfolio. This will protect its value if the markets crash.

If the markets crash you can shift part of your money from the debt Ulip to the equity Ulip and when the markets rise you could get a profit.

If you are a savvy investor who makes use of the switching options then Ulip gives you tax benefits.

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Pros and Cons of Buying Online Uips-IndianMoney

 

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IndianMoney.com is not a seller of any financial products. We only provide FREE financial advice / education to ensure that you are not mis-guided while buying any kind of financial product

Pros and Cons of Buying Online Ulips

You can buy anything online these days. Can life insurance be far behind? You can buy a term life insurance policy or even a Ulip online these days.

This begs the question…Is an online Ulip a good buy?

Online Ulips are cheap and there is a reason for it. There are no expenses for the insurance agents and the distributors of the Ulips as their services are not required by the Insurer. You come online and make a purchase. This results in a saving in commissions for the Insurer and this benefit translates to a lower premium for you.

The bane of Ulips used to be the high premium allocation charges. This used to be as high as 30% of the premiums you paid before September 2010 as high commissions were paid to life insurance agents selling you Ulips.

Post September 2010 reforms the premium allocation charges reduced to 7-8% of the premiums you paid. This meant a huge reduction in the premiums you pay for the Ulips.

The online option of purchasing a Ulip goes one step further. It completely does away with the premium allocation charges. This savings is transferred to you through a cheaper premium if you avail an online Ulip.
 

Galloping stock markets: 

The galloping stock markets mean a huge interest in Ulips. An equity Ulip invests in the stock markets and if the stocks markets are rising rapidly Ulips give good returns.

This means interest in the online Ulips increases.

The tax benefits of the Ulips:

The premiums you pay on a Ulip are tax deductible up to INR 1.5 Lakhs  under Section 80 C of the income tax act. The maturity amount you get when the policy matures is tax free under Section 10 10(d).

The season of January to March is when you seek life insurance products which give you tax benefits. This is when you must purchase an online life insurance Ulip to save on your taxes.

The tech savvy generation:

If you reside in an urban area you would be tech savvy (use internet a lot) and also financially knowledgeably. You know what you are buying You make a better disclosure as they are no insurance agents involved.

You have to answer all the questions online yourself and this means you are more honest (a better disclosure).

There is no scope for the life insurance agent to advise you to misrepresent (present false data) to save on your premium.

There is no need of medical tests especially if you are below 50 and submit proof of good health.

All these make buying a Ulip online a good deal.

There is a point of worry …You need to be absolutely sure of the Ulip before you make a purchase. The Ulip has a lock in period of 5 years and if you pick the wrong online Ulip you will be stuck for this time period making it difficult to exit the policy.

You need to check all the features of the Ulip as well as the performance track record and see if the Ulip is in alignment with your long term goals.

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What are The Charges in a Unit Linked Insurance Plan - IndianMoney.com

 

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IndianMoney.com is not a seller of any financial products. We only provide FREE financial advice / education to ensure that you are not mis-guided while buying any kind of financial products

What are the charges in a unit linked insurance plan?

All products have charges. A ulip is no different and has charges associated with it. For many years Ulips were an insurance product not understood by those who purchased them.

This meant Ulips were mis-sold by life insurance agents who pocketed huge amounts in commissions by selling you a Ulip.In order to save the Ulip and the insurance sector in India IRDA introduced reforms in Ulips in September 2010.

Ulips as a product were modified and their charges were no longer hidden. This meant you knew exactly where you were being charged in your Ulip.

Charges in a Ulip:

Premium allocation charges:

 When you pay your premium and invest in a Ulip the premium allocation charges are deducted from the premiums you pay. This may be around 7-8% of the premiums you pay.
 

This charge goes towards paying the agents and the distributors who sell you the Ulip their fees and commissions.

The mortality charges:

A Ulip is a combination of :

                   Insurance + Investment

You have to be provided life insurance in a Ulip and the Ulip charges you for it. This is the mortality charge. The mortality charge depends on your age , Your health condition and the amount of life insurance you avail in a Ulip.

If you are older in age, greater is the amount charged as a mortality charge. It is assumed that as you grow older you need a higher insurance.

Fund management charges:

The Ulip charges you for managing the money you invest in it. The charges are called fund management charges. The charges depend on the type of Ulip.If the Ulip invests in equity, the fund management charges are 1.35% of the assets under management.(Pool of money invested by you and all other investors).
 

The fund manager needs to actively manage the Ulip and charges for his services. The charges are lower if it is a debt Ulip as the Ulip is passively managed.

Policy administration charges:

The Insurer incurs expenses to manage the Ulip. The expenses could be for administration expenses like paperwork, salaries of the work force and the reminders sent to collect your premiums.

This is usually charged each month and is around INR 60-100 each month for the first 3 years of the Ulip.

Surrender charges:

Ulips have a compulsory lock in of 5 years. If you surrender the Ulip before this period you have to pay surrender charges on the Ulip.These charges can be 12-15% of the premium if you surrender the Ulip in the first year and move down to 4-5% if you surrender the Ulip after 3 years.

The maximum surrender charge is INR 6000 if you surrender the Ulip in the first year.It is very essential for you to know what you are getting into before purchasing a Ulip. A study of the charges in a Ulip definitely helps you to understand a Ulip better.

There is no greater dampener for an insurance agent who is trying to mis sell you a Ulip than to show him you know your Ulip.

  

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