Introduction
In other words, ULIPs are almost similar to mutual funds (MF) and the only difference between the two is ULIPs comes with an insurance cover. The tax rules introduced in 2018 favoured ULIPs in terms of taxation as it remained out of the tax bracket, while the gains above Rs 1 lakh made in equity-oriented Mutual Funds are subject to tax at 10% of long-term capital gains.
However, investment in ULIPS has become less attractive post-Budget 2021 ( Refer Budget 2021 ), with the annual premium above Rs 2.5 Lakh becoming taxable. If you were relying mainly on ULIPs for saving taxes and for your retirement planning, you may need to rethink your plan now. With ULIPs losing the tax advantage to some extent, investors may explore other investment products that could offer a better return. However, if your annual ULIP premium is less than Rs 2.5 Lakh, there is no need for you to get bothered.
1. ULIP vs. EQUITY
ULIP becomes less attractive than equity Mutual Funds as they have a higher lock-in period of five years. ULIPs force investors to allocate money towards insurance, while no longer providing the tax benefits (on premium above Rs 2.5 lakh per annum). The death benefit, in all insurance policies, however, remains tax-exempt in the hands of the nominee. ULIP allocate a share of the investment amount towards insurance and this portion varies with the age of the investor, typically the portion increases with age.
Quick Facts
Expenses involved between ULIPs and Equity MFs ?
| Charges |
| ULIPs | Equity MFs |
| Premium Allocation Charges | 4% to 5% for first 5 years)
2% to 3% (post 5 years) | NIL |
| Fund Management Charges | 1% to 2.5% per year | 2 to 2.75% per year |
| Policy Administration Charges | ~1200 to 2000 per year | NIL |
2. Savings
A ULIP offers range of benefits too in a single plan, which a Mutual Fund doesn’t offer. ULIP helps to build wealth over the long-term through a variety of investments and provides a financial security to the insured person by providing the necessary life insurance cover.
In addition, there are certain ULIP plans which offer critical illness benefits and health riders. ULIP also provides an opportunity for policyholders to diversify their portfolio by investing across hybrid and debt funds in addition to equity funds.
3. Investment and Insurance
If a person is able to manage investment and insurance needs separately, a combo of term insurance plan and mutual funds will work well. But if someone wants to keep both insurance and investment under one plan, ULIPs is a better option. It is generally better to keep insurance and investments separate instead of using a single product to address both needs. Standalone term insurance has better benefits as they provide higher coverage for a much smaller premium compared to a Ulip. Hence for the majority of the investors, equity MFs and standalone term insurance are best suited to address their insurance and investment needs.
For those who want insurance and investment together, ULIPs with its add-on features can be used to plan the long-term needs.
Conclusion
To summarize, both the products will keep on attracting customers based on their features and benefits. But if your annual ULIP premium is greater than Rs 2.5 Lakh, then you may consider other options as you have tax exposure. For retirement planning, investing in a mix of ULIP, NPS, EPF, equity funds, debt schemes, FDs, real estate and gold are likely to be very helpful.
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