Marketers pitch ULIPs because they combine life insurance with wealth-creation and tax-saving opportunities.
If you are in the old tax regime, you can get tax deduction for paying up to Rs 1.5 lakh in ULIP premiums.
You don’t pay any capital gains tax if annual premium does not exceed Rs 2.5 lakh.
Earlier, ULIPs charged exorbitant fees, but they have come down now
Premium allocation charges: Usually steep. Can be as high as 6-8% initially Policy administration cost: Can be as high as 2-3%
Fund management fee (equity fund): Around 1.35% *General estimates
Though it blends insurance and investment, the life insurance coverage may be insignificant. And even if it is, it may not be a value-for-money investment.
If ULIP’s life coverage is high, its premium will be higher. A Better option is to divide the ULIP premium money into a tax-saving fund and a term plan.
They offer high life insurance coverage at a very economical price.
These funds have historically outperformed the wealth-creating investments of ULIPs.
At the time of policyholder’s death, the nominee usually gets the higher of the insurance and investment amounts. It won’t get both amounts.
You can receive the entire tax-saving fund amount. Plus, you’ll receive the insurance amount of the term plan.
There’s a lock-in period of 5 years. Various charges are deducted for premature closure even beyond 5 years.
A tax-saving fund has a 3-year lock-in period. No charges are deducted after that.