ULIP is an investment option available to an investor who also needs insurance coverage. In the midst of confusing options, an amateur investor finds himself stuck. He doesn’t understand which investment opportunity he should explore to get the best benefits. Take the instance of mutual funds and insurance .
Ever since mutual funds were introduced, they became popular as they promised capital market participation at lower investments. The risk was diversified, the common investor got to taste the returns of the stock market and mutual funds prospered.
As mutual funds were gaining popularity, life insurers launched Unit Linked Insurance Plans. These plans mirrored the concept of mutual funds. However, they provided life insurance coverage too, a feature missing in mutual fund investments. Today, investors have come up with a new formula to counter ULIP investments– mutual funds + term plans. But, does this formula score over and above ULIPs?
Mutual funds with term insurance
Under this formula, you can invest in your chosen mutual fund scheme and fulfill your investment need. For life insurance need you can invest in a term insurance plan. So, while you can earn returns through your mutual fund investments, you can get insurance coverage through the term life plan.
Benefits of mutual funds schemes with term insurance
The benefits of combining mutual funds with term insurance are as follows:
- You can earn good returns along with a valid insurance cover.
- A term plan enables you to avail a high Sum Assured at affordable premiums.
- Mutual fund schemes give you tax benefits. Equity funds are tax-free after a year. Debt funds give you a benefit of indexation if redeemed after 3 years. Under ELSS schemes, the investment, the returns, and the maturity value are all tax-free. Moreover, term plans also provide tax-saving. The premiums paid and the death benefit received are both tax-free.
- Mutual funds are short-term investments
- You get easy liquidity in these schemes. Your investments can be redeemed anytime without any restrictions (except in case of ELSS schemes where there is a 3-year lock-in period).
ULIP – unit link insurance plan
Unit Linked Insurance Plans are life insurance plans which invest your premiums in different funds chosen by you. These funds invest the collected premium in capital market instruments. Thus, ULIPs also participate in capital markets, just like mutual funds. Moreover, life insurance coverage is inbuilt under the plan which pays a benefit in case of premature death.
Though, on the surface, mutual funds + term insurance look similar to ULIPs, there are differences. Moreover, ULIPs are better than mutual funds with term plans. Want to know how? Here are the reasons –
ULIP saves tax
The premiums paid and the benefits received are tax-free under a ULIP plan. For mutual funds, the investments made are tax-free only in ELSS schemes. For any other schemes, the investments are taxable. In case of redemption, though equity funds give tax relief, debt mutual funds are taxed at 20% with indexation benefit if you redeem them after 3 years.
Free switches lower risks
In ULIPs, there are different types of investment funds – equity, debt, balanced, etc. You can choose to invest in any fund. Moreover, ULIPs allow switching. If, at any period of time, your risk appetite or your investment strategy changes, you can switch between funds and that too, free of cost. This lets you manage your investments easily. This switching does not even involve any taxation.
Mutual funds do not provide this facility. If you want to switch your investments, you might incur tax if your holding period was short. Moreover, moving to a different scheme might also incur an exchange fee. So, while ULIPs allow you to lower your investment risks, mutual funds prove more volatile.
ULIP inculcates a saving habit
There is a lock-in period of 5 years under ULIPs. Only after the first 5 years, you become eligible to withdraw. Thus, ULIP force you to pay premiums for these 5 years developing a saving habit in you. Mutual funds are liquid and do not motivate you to hold your investments for a longer tenure. Thus, they don’t build a saving habit. Moreover, since ULIPs require you to remain invested for a longer tenure, the returns are better compared to mutual funds where you invest for a shorter tenure.
So, experts recommend ULIPs over mutual funds if you are looking for a longer term investment horizon. There are child ULIPs and pension ULIPs too which help you fulfill your two most important life goals – child education and retirement planning. Child insurance ULIPs have premium waiver benefit which ensures a corpus even in your absence while pension ULIPs pay you annuities lifelong. So, choose ULIP over mutual funds with the term and get better benefits.