ULIPs and Their Tax Benefits Explained

Unit Linked Insurance Plan, more commonly known as ULIP, is a market-linked product that provides the benefits of both an investment as well as an insurance cover. ULIPs are long-term investment plans that are aimed at achieving certain goals such as retirement, child’s education or wedding, etc. Bajaj Markets understands the important of these goals and offers ULIP plans that help you achieve the same. When you invest in a ULIP plan, you get a 10x (on your premium) life insurance cover and the premium left after deducting certain charges is invested in a fund, that has its base in equity or debt or both.

 

How do ULIPs operate?

 

When you make a ULIP investment with Bajaj Markets, you get the option to invest your monthly or annual premium in shares, bonds or funds. ULIPs have also gained popularity for they allow you to switch your portfolio from debt to equity and vice versa, depending on market performance or your life stage goals.

 

Tax benefits of ULIP

 

With regard to Section 80C and 10D of the Income Tax Act, there are tax benefits on ULIP investments that you can enjoy. This is to say that you can avail a tax exemption on ULIP of up to Rs. 1.5 lakhs on the premium that you pay under Section 80C of the Income Tax Act, 1961. What’s more? Your returns on maturity of the ULIP are also exempt from tax under Section 10D of the Income Tax Act.

 

Lock in period

 

One of the changes introduced in 2010 by the IRDAI (Insurance Regulatory and Development Authority of India) was to increase the lock-in period for ULIPs from 3 to 5 years. You may not be able to reap the advantages of your insurance policy unless you have completed the full lock-in period.

 

Types of ULIPs

 

ULIPs can be categorized in different ways depending on investment objective, type of investment and as explained below:

1. Investment: When ULIPs are categorized on the basis of investment it constitutes of 3 types of funds i.e. equity funds, balanced finds & debt funds.

• Equity Funds: The premium can be invested in equity markets
• Balanced Funds: The premium can be balanced between debt & equity market to lower the risk for investors.
• Debt Funds: The premium is used for investing in debt instrument which also carries a lower risk and offers lower return.
• Goals: The second type of categorization is based on the end use of funds which constitutes retirement planning, child education and wealth creation.

1. Retirement Planning: This type of ULIP plans are for individuals you start planning for retirement while they are still earning.
2. Long term Financial Goals: In this type of ULIP plans is when you invest with the long term financial goal of saving for your child’s higher education.
3. Investment Plan: This, on the other hand, is for making investments in building a heavy corpus which can be put aside for future use.

2. Type I and Type II: ULIP plans can be categorized into two types based on death benefits they pay out.

• Type I: In the event of death of the insurance company has to pay the higher of fund value or sum assured to the beneficiary or the nominee.
• Type II: Here the company pays the sum assured value plus the fund value to the nominee or beneficiary post policy holder’s death.