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Stay Focused

An investor must stay focused & define their need before narrowing down on a financial product...

I have been told that if I buy a single-premium ULIP, then I do not have to worry about periodic annual payments. I was also told that if my premium was Rs1 lakh, I could exhaust the entire amount under Section 80C. I am thinking that this is a better option than just putting money in an ELSS because I get the tax benefit and the combination of investment and insurance. Also, the commission charges and administrative charges on single-premium ULIPs are lower than the other plans where annual premiums have to be paid. And it is no bother of following up on premium payments every year?-- Nesha

First of all, you need to get your focus right. What really is it that you want? Is it insurance that is of prime consideration or is it tax planning?
If it is insurance that is your main target, how much would you like to be insured for? Have you figured that out? Did you know that single premium unit linked insurance plans (ULIPs) generally have a low sum assured because, ironically, a life cover is not its prime focus? So your insurance needs may most probably not be met by this product. It is mandatory for the insurance company to give a minimum cover of 1.25 times the premium. So many schemes will just provide this cover. That means your life cover could well be a measly Rs1,25,000. Or even if it is 5x the premium, it will just be Rs5 lakh. Is this what you want? It's obvious that a single premium ULIP can never be a core insurance solution.

Now let's look at the tax benefit.
You are hoping that the premium of Rs 1 lakh will give you the required deduction under Section 80C. You are right that premium paid on ULIPs qualifies for a deduction under this section. Here is the catch. The sum assured in a ULIP should be at least five times the premium amount to avail of it. If it is lower, you will be entitled to the benefit on the premium amount only up to 20 per cent of the sum assured. So if your sum assured is Rs 1.25 lakh, the benefit you will get under Section 80C will be just Rs 25,000 (20% of Rs 1.25 lakh). So your assumption that the entire Rs1 lakh paid as premium will get you a benefit under Section 80C is completely misguided.
So your insurance needs and your tax needs are unlikely to get met by this product.

At Value Research we have always been very articulate in our view that insurance and investment (as is done in a ULIP) should never be mixed. You are like most investors who want to combine insurance and investment. But they both serve completely different needs. One is looking at protection against a calamity or eventuality, the other looks at wealth creation. Don't mix up the two.

If you want to get the benefit of insurance and the tax break, opt for a term insurance policy. The actual sum will depend on how much you are earning, whether you have any debts or loans and how many dependents you are supporting. Let's say you get insured for a large amount and pay Rs 50,000 as the premium. The balance Rs 50,000 you can invest in an equity linked savings scheme (ELSS), which is the tax saving mutual fund. Both of these will get you the tax deduction under Section 80C.

Under the new Direct Tax Code (DTC), which comes into effect on April 1, 2012, ELSS will no longer be a category. So you can consider opening a Public Provident Fund (PPF) account or even consider the National Pension Scheme (NPS).
Where commission and administrative charges are concerned, it is true that companies incur lower costs on servicing single-premium policies. Not only are commissions lower but they do not entail a recurring policy administration charge. So it is quite possible that an investor will have to shell out lower charges on a single-premium policy as against a regular-premium one. However, there are costs like fund management charges that will continue to be deducted from the accumulated fund value from the second year onwards.

Once you opt for a term insurance or PPF, you will have to make the payments or contributions every year. But that should not be too must of a problem. Granted, a one-time premium is convenient. Not only does it rank high on convenience but there is no risk of policy lapsation. But there is a cost to pay in terms of low coverage and low returns. So first define your need and then narrow down on an optimal product.

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