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What are ULIPs and their benefits? How Are ULIPs Taxed In India?
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A detailed guide on Unit Linked Insurance Plans (ULIPs): Know Features and Benefits

Unit Linked Insurance Plans (ULIP) are one of the most popular investment choices among individuals looking to blend investment and insurance into one product. For example, suppose you’re not content with the returns offered in a savings account, money-back plans, and endowment policies. In that case, a unit-linked insurance plan is a very good option since the premium paid is invested in equities or bonds or in balanced funds or all based on your choice.

Investing in equity markets is proven to build wealth over the long run. A product that combines insurance protection and investment has made many seriously look at ULIPs as a possible investment choice concerning returns, security, risk management, etc.; despite the low insurance penetration in India, ULIPs have managed to create their own fan base among people, mainly because of its salient features.

Knowing what the ULIP plan is, let us look at the various types of ULIPs available in the market, based on the type of premium, your financial objectives, features, etc.

  • Single-premium ULIP: This is a ULIP policy wherein the policyholder has to pay the complete premium as a single payment. Post this, there is no requirement to pay monthly premiums, but the coverage shall continue for the entire tenure.
  • Regular premium ULIP: In this type of ULIP plan, the premium is payable every month/ quarter or as per your chosen preference for the entire duration of the policy term.
  • Equity-fund-based ULIPThese ULIPs invest a major percentage of your premium in equities, creating an opportunity for high returns, but the risk is also quite high.
  • Debt-fund-based ULIPHere, the ULIP invests a major portion of your premium in government securities, corporate bonds, i.e., fixed interest instruments, company deposits, treasury bills, etc.; these ULIPs are ideal for those who are risk-averse and prefer moderate returns along with insurance cover.

 

Taxation of ULIPs 

Saving on taxes through insurance is a great decision and is why many people choose to buy insurance policies, as it helps them save income taxes while planning for their life protection.ULIP funds help save up to Rs.1.50 lakh under Section 80C of the premiums paid. Similarly, the maturity proceeds paid by the insurer at the time of maturity or death benefit are completely tax-free in accordance with income tax exemption under section 10 (10D).

The Union Budget 2021-22 proposed several modifications to the manner in which ULIPs are taxed. According to the new tax regulations, for the ULIP plans purchased in February 2021 or later, the maturity amount received by the policyholder is taxable as capital gains if the premium exceeds Rs.2,50,000 per year. However, for ULIP policies that were bought before February 2021, tax-free maturity proceeds shall continue, irrespective of the annual premium paid.

Benefits of Unit Linked Insurance plan

ULIPs might seem similar to any other insurance plan, but it is not so, primarily because of their market-linked investments. Hence, there are some unique advantages for these policies, which are explained below: 

  1. Insurance and Investment: With regular life insurance policies, you are protected against the risk of life, but ULIP policies do not just provide protection against risk but also guarantee the growth of your investment. The premiums are invested in equity or debt funds based on your risk profile that should produce good returns in the long term. So instead of investing in equity markets directly, ULIPs help you reduce the risk through proper asset allocation while at the same time promising the policyholder with death benefits In case of any unfortunate events.
  2. Customise your plan: ULIPs offer plenty of choices on where to invest your funds and the kind of strategy that needs to be followed. While a portion of the funds is set aside to cover the insurance portion. The other part is invested in inappropriate funds as per your future needs, return expectations, and risk tolerance. You may decide to move your investment to debt funds during a market decline, which is safer than equity funds and can safeguard your capital without causing much loss. Once the market picks up, you can shift to equity funds for faster growth. Also, you can decide on the insurance coverage or sum assured value, premium paying period, policy term, number of persons to provide coverage, etc.,
  3. Riders: Though it is called a ULIP insurance plan, it provides the benefits of the traditional term insurance plan, including adding riders. Riders are value additions to your insurance policy that can enhance the functionality of the policy to address specific tragedies of life. Some of the common riders are Total Disability rider, Critical illness rider terminal illness rider, etc.,
  4. Goal-based investment: ULIPs are an excellent investment vehicle for long–term investing and can help you achieve the goals through their unique approach. Let’s say if you are looking to reach some of your most important objectives, like buying a property, building a corpus for your children’s education, or planning your retirement savings, it is necessary to start saving regularly. This can be accomplished by investing in ULIPs since the investments are managed in a systematic manner that will help you establish a solid foundation for your dreams in the most efficient way that is possible. A term insurance policy can assist you in completing the insurance requirement, but investment in united linked plans helps you take care of insurance and investment both at once.

 

For those who are seeking long-term returns and capital appreciation that are on the same level as equity markets but do not wish to get involved in the stock market directly, ULIPs are the safest choice. They are the best solution for investment and your insurance needs, along with many tax benefits. Moreover, it is always suggested for you to start investing in ULIPs while you are young as the benefits increase as you grow older. Above all, the insurance coverage shall also ensure that you are at peace knowing that your family members are well protected even after your presence in this world.

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