As investment tools, ULIPs have come a long way in the past decade. They have become more and more popular as tax-saving tools. With the introduction of the LTCG in 2019, they came at the forefront. What is it that makes ULIPs work and what can you expect from them? Let’s find out.
What is a ULIP?
ULIPs are tax-saving tools which help you invest as well as secure your family- all with one single plan. A part of the premium paid regularly is invested in funds selected as per your risk appetite, and the other part is utilized for a life cover. This makes them neither pure insurance plans nor pure investments, but hybrid products.
Recently, they were in the news for being out of the ambit of the LTCG tax. Let us begin with what the LTCG tax is.
The LTCG tax
The Long Term Capital Gains tax is levied at a rate starting from 10% in India. A capital gain is an income earned from the sale of a capital asset. The LTCG is applicable on certain assets held for more than 36 months (more than 12 months in some cases).
Starting April 1, 2018, the LTCG became applicable on long term capital gains more than Rs.1 lakh from sale of equity shares or equity-oriented fund units.
Implications for investment tools
The newly announced tax is applicable on some of the most popular investment tools like equity shares, mutual funds, and even ELSS investments (which are meant for tax-saving).
Why ULIPs are gaining popularity
ULIPs were the only market-linked instruments to be left out of the ambit of the LTCG tax. That is why they came to the fore in 2019. However, there are also other reasons for the growing popularity of ULIPs, like their EEE tax status.
EEE tax status of ULIPs
EEE refers to Exempt-Exempt-Exempt. As per this principle, ULIPs are exempt on three fronts.
Return of mortality charges
Mortality charges are generally levied on insurance products, which is why they are applicable on ULIPs as well. It is the actual cost of insuring a life, and is deducted on a monthly basis. Mortality charges depend on the policyholder’s age, sum assured, gender, smoking habits, health factors, etc. It is usually less for healthier, younger persons.
Nowadays, some insurers have started offering return of mortality charges. This saves the cost of a ULIP investment significantly, and converts into better ULIP returns.
Exemption of other charges
Since ULIPs have started becoming more and more popular, competition in the market has increased. Insurers have started offering lucrative benefits for their ULIP. A major advantage has come in the form of lesser charges.
A ULIP generally comes with a lot of charges like mortality charges, fund management charges, premium allocation charges, partial withdrawal charges, switching charges, revival charges, and miscellaneous charges. These charges, of course, made for a considerable expense. However, now you can reap all the benefits of a ULIP without too many charges.
Invest 4G plan
Canara HSBC Oriental Bank of Commerce’s Invest 4G ULIP offers 7 different fund options for flexibility in investing. It levies no charges on premium allocation, partial withdrawal, switching, revival, policy administration, medical examination, or miscellaneous expenses. Furthermore, it also offers loyalty additions and wealth boosters to increase your ULIP returns.
What to expect in 2020
Why ULIPs are good for a slowdown
We have all read about the global economic slowdown arising due to international trade tensions. India will also be affected sooner or later. Markets will change and investors will be worried. At such a time, a ULIP can be a saving grace as it allows great flexibility in terms of switching between equity or debt oriented and balanced funds. You can easily bring your investments back on track if either of the categories isn’t performing well.
Overall, 2020 seems to be a good year for ULIPs. Even more so if you are a first-time investor, as you would rather play safe in the beginning.
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