Ever wondered how you can earn interest on your savings while safeguarding your family’s future? Unit Linked Insurance Plans (ULIPs) provide a unique solution by offering the dual benefits of investment and insurance. In this article, we will explore why ULIPs are considered one of the best tax-saving investments in India.
What is a unit-linked insurance plan?
A unit-linked insurance plan is a type of insurance product that combines life insurance coverage with investment options. A portion of your premium goes towards providing life cover, while the remaining amount is invested in various market-linked funds such as equity, debt, or hybrid funds. This gives you the opportunity to grow your wealth while enjoying the protection of a life insurance policy. Always use a ULIP calculator to understand the anticipated future value of your investments.
ULIPs offer several advantages over traditional insurance plans. Firstly, they provide flexibility in investment choices, allowing you to switch between different funds based on your risk appetite and financial goals. Secondly, ULIPs have a minimum lock-in period of 5 years, which encourages long-term goal-centric financial planning. Additionally, ULIPs offer tax benefits at different stages such as premium payments, debt or equity switches, and maturity benefits.
Example:
Let’s consider an example to understand how ULIPs work. Rajesh is a 35-year-old professional who wants to save for his child’s education. He decides to invest in a ULIP with an annual premium of ₹50,000. Out of this amount, ₹40,000 goes towards the life cover component and ₹10,000 is invested in market-linked funds.
If Rajesh chooses an equity fund and earns an average annual return of 12% over the next 15 years, his investment could grow to approximately ₹17.5 lakh. In addition to the investment growth, his child will receive a life cover of ₹40 lakh in case of an unfortunate event. This offers Rajesh the peace of mind that his child’s future is financially secure.
ULIPs also provide tax benefits under Section 80C and Section 10(10D) of the Income Tax Act, 1961. Let’s dive deeper into these tax benefits and understand how they can help you save money.
Tax benefits of unit-linked insurance plans
ULIP Premiums: Premiums paid towards ULIPs are eligible for deduction from taxable income under Section 80C of the Income Tax Act, 1961. You can claim a deduction of up to ₹1.5 lakh per financial year on the premium paid for the policy.
Maturity Benefits: The maturity amount received under a ULIP policy is exempt from income tax under Section 10(10D) of the Income Tax Act, 1961.
Tax-Free Payout: In case of an unfortunate event leading to the death of the policyholder, the life cover amount paid to the nominee is exempt from tax under section 10(10D) of the Income Tax Act.
The power of goal-centric planning
One of the key advantages of ULIPs is their ability to facilitate goal-centric financial planning. Whether you are saving for your child’s education, planning for retirement, or purchasing a house, ULIPs can help you achieve your long-term financial goals. Refer to a ULIP calculator, which can help you understand how fund allocation impacts your investment returns.
ULIPs have a minimum lock-in period of 5 years, encouraging disciplined savings and preventing hasty withdrawals. This lock-in period ensures that you stay committed to your financial goals and allows your investments to grow over time. After the completion of the lock-in period, you also have the option to make partial withdrawals from your ULIP to meet any urgent financial requirements.
The benefits of top-up investments
Unit-linked insurance plans provide an additional benefit called a “top-up” facility, which allows policyholders to invest extra money in the policy.
The top-up amount is eligible for deduction under Section 80C of the Income Tax Act, providing tax benefits on these additional investments.
Example:
Rahul, a 40-year-old investor, has already exhausted his Section 80C limit by investing the maximum amount allowed in various tax-saving instruments. However, he wants to continue investing for his retirement. Rahul decides to utilize the top-up facility offered by his ULIP and invests an additional ₹50,000 per year. This top-up amount is eligible for tax deduction under Section 80C, allowing Rahul to save more tax while securing his future.
Choosing the right unit-linked insurance plan
When investing in a ULIP, choose the right plan that aligns with your financial goals and risk appetite. Consider factors such as charges, fund performance, flexibility, and transparency before deciding.
Use the ULIP calculator to evaluate different ULIP plans based on your investment horizon, risk tolerance, and financial goals. This will help you make an informed choice and select the ULIP that suits your needs.
Conclusion
In conclusion, ULIPs offer the dual benefits of investment growth and life insurance coverage, making them one of the best tax-saving investments in India. With their goal-centric planning approach, flexibility in investment choices, and tax benefits on premiums and maturity amounts, ULIPs provide individuals with a comprehensive financial solution. Whether you are saving for long-term goals or need flexibility for short-term expenses, ULIPs can be customised to suit your needs. So take advantage of these benefits by investing in a suitable ULIP plan today!
