Unit Linked Insurance Plans, popularly referred to as ULIPs, have become popular in India riding quite a few benefits such as higher rate of returns, tax efficiency, lock-in period withdrawal facility, the convenience of top-up and offering higher returns of mutual funds.
Why do experts think that ULIPs have some advantages over bank fixed deposits (FDs)? Let’s dig. But before that, we need to know what ULIPs are.
What’s ULIP?
ULIP is a life insurance plan which offers a maturity benefit too. A part of the premium that a policyholder pays is channelled into an equity or debt mutual fund that is predesignated by the buyer. Therefore, its returns are linked to the performance of the mutual fund. A ULIP offers more tax exemptions that FDs. Only those FDs which have tenure of 5 years can offer tax saving benefits. The tax exemption is available only on the amount investment.
Income tax benefit
But ULIP investors get income tax deductions on both the premiums paid and the maturity amount. FDs don’t have any insurance coverage. However, ULIPs are insurance products that offer a shield, the amount of which you can decide.
The flexibility angle
FDs lack flexibility – it is the other side of the coin that offers predictability and is considered a positive benefit by some depositors. The money invested in an FD has to be kept there till maturity and no changes are allowed.
However, for ULIPs flexibility is one of the key features. Depending on the situation in the market, the policyholder can switch fund allocation from equity to debt and vice versa.
Impact of inflation
The amount that accumulates in an FD is dependent on factors such as inflation. If the rate of inflation goes up, the real value of the fund can corrode.
However, investments in a debt mutual fund can actually go up since bond rates rise along with inflation. The rate of returns in a ULIP can vary according to market conditions, but the interest earnings from an FD is fixed.
Those with less risk appetite will find an FD more attractive while someone who wants to extract gains from the market will settle for ULIP which will provide the additional benefit of insurance.
Unit Linked Insurance Plans have an attractive combination – insurance and mutual funds. No wonder that this category has gained popularity fast. Personal Finance Business News – Personal Finance News, Share Market News, BSE/NSE News, Stock Exchange News Today
