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How Benefits ULIP Investment in Tax?


July 5, 2019 ( Newswire) ULIP was first introduced in India by the Unit Trust of India (UTI) when the then government of India opened the Indian insurance sector to foreign firms. The industry is regulated by the IRDA (Insurance Regulatory and Development Authority). Several foreign insurance companies showed a keen interest in India. As per the guidelines of the IRDA, these companies tied up with Indian partners and started operations in India. There are currently 57 insurance companies out of which 24 are life insurance companies.

What is ULIP?

Before investing in any plan or policy, it is important to get as much knowledge as possible on the investment.

ULIP (Unit Linked Insurance Plan is a life insurance policy with an investment component. A portion of the premium is utilised to cover the policyholder, and the other portion is invested in debt or equity fund by the insurers. The fund managers invest the aggregate amount collected from policyholders. It is similar to Mutual funds. Individual investors can customise their investment portfolio and opt for investments that suit their financial goals and risk appetite. Every policyholder is allotted "units" according to their investment. The net asset value of individual funds changes daily and depend on the market conditions and fund performance.

What are the Benefits of ULIP?

Apart from tax benefits, ULIP have other benefits, some of which are mentioned below:

  • Lock in Period
    ULIP comes with a lock-in period of five years. They are designed as long term investments, and unlike ELSS, these policies can be bought once, while the tax benefit is applicable every year till the premium paying term. This also helps to inculcate a habit of investing in long term instruments which are more lucrative in the long run.

    It should be noted that ELSS comes with the shorter lock-in period of three years so the money invested is only available in the fourth year. Your investment can be withdrawn only after the completion of three full years.

    In the case of ULIPs, the lock-in period is calculated from the date of issue. The premium can be paid on a monthly or annual basis or as a lump sum amount.
  • Potentially Better Returns Than Other Plans
    ULIP has the potential to give you a better return on investment than most financial instruments. This is because of the equity advantage and investment in various investment funds. In the case of ULIPs, the tax saving opportunity is also a big crowd pleaser.

    The majority amount depends on the performance of your investment portfolio and the state of the market during that particular period. Despite the capital protection feature in ULIP plans, they do not offer inflation protection. Maturity amounts do not attract tax for the policyholder. This makes it better than most investment options.

    Bank fixed deposits, and other tax savings come with some lock-in period. Moreover, the returns that you receive are added to your taxable income.
  • Flexibility
    In ULIP plans, you can switch funds during the term. You can customise your portfolio by choosing any funds in growth, balance, income funds and equity funds as per your own risk appetite or if you have a change in your investment goal. The ULIP managers allow four switches per year without any charge.

    In the case of ULIP, you simply buy the policy and let the fund manager do the rest. You can make changes in the allocation of the fund anytime during the term until it has run its full maturity. Tax benefits under ULIP are twofold.
    1. Tax Benefits During
      The investment that you make is tax deductible under section 80C of the Income-tax act 1961. The maximum amount of rebate is Rs 1.5 lakhs per financial year. This benefit is available across income tax slabs irrespective of your income. This benefit is available to investors who have kept their insurance policy active for at least five years. If the ULIP is discontinued before two years, then the rebates are withdrawn
    2. Tax benefits During Payouts
      There are three occasions when payouts are given to the investor/nominee. They are at the time of maturity, surrender or on the death of the insured person.
  • Best of Both Worlds
    Term insurance does offer life cover and tax savings, but they do not offer any returns. ULIPs, on the other hand, give you the tax advantage of up to Rs1.5 lakhs under Section 80C of the Income Tax Act 1961. It features a minimum sum assured equal to 10 times the annual premium for investors below 45 years.
  • First Time Investors
    Investors who are comfortable with Fixed Deposits are slowing venturing into mutual funds and insurance policies mainly for tax savings. According to SEBI figures, mutual funds peaked to 6.5 crores at the end of last year. The investing trend of investing in market-linked instruments catching up and is making more sense, even to first-time investors.

    Return on investment is at least equal if not better than mutual funds, in the long term. A first-time investor willing to take a minimal risk can choose from the huge options available in the market. However, it is important for the first time investor to know his investment horizon and the goal that is set.


Certain changes and reforms are made in the IRDA guidelines. These are to make ULIPs more investor-friendly than when they were first launched. Many costs like premium allocation charges, administration charges, fund management charges, and surrender charges have reduced. This is welcome news for investors, especially small investors.

ULIP is considered as one of the best tools for wealth creation. This is possible as these are long term investments and because of the diversity of funds offered. These ULIP plans are great for those who want to start young and can take advantage of the current market sentiments.

A word of caution - If you are not sure about the plan you are buying then it is advisable to talk to the customer service or a financial advisor.

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