Should you invest in ULIPs? Here’s what you need to know

The Unit Linked Insurance Plan is an scheme where an individual’s investment is divided in two parts - life insurance and equity or debt or both as per your requirement. ULIP can be used for retirement planning, children education or another important events. But, Goldman Sachs believes that investment in this product is set to decline in future. "We see a risk of ULIP (Unit Linked Investment product) sales decline, cost over-runs and higher surrender rates in the near term in the scenario of an equity market drawdown due to lingering concerns stemming from the liquidity crunch at NBFCs (non-bank financial corporations), weaker macro and uncertainty in the run-up to the general election due in April - May," it said.
 
However, according to the American investment banker,  impact will be temporary as ULIPs are now a more transparent and competitive product and our analysis of past events indicates strong recovery in ULIP AUMs post equity shocks.

Over the long term, Goldman sees, ULIPs gaining share in the savings flow, as they are much more competitive now in terms of transparency, management fees, and surrender charges — especially since recent TER (Total Expense Ratio) regulations on Mutual funds.  

Why invest in ULIPs?

When investment in ULIPs are made, an insurance company takes a part of your premium and invests them into shares, bonds, etc. Remaining balance is used for insurance cover. Unlike NPS, the lock-in period in ULIP is very short up to 5 years. However, considering its also an insurance cover, hence,  a customer has an option to take investment in ULIP from 10 to 15 years. 

Premium in ULIPs can be paid between lowest Rs 10,000 to maximum Rs 1.5 lakh. 
 
Guess what! Apart from Rs 1.5 lakh tax deduction under 80C, an ULIP gains after maturity is fully tax exempted under section 10(10D). But there’s  catch, let’s find out! 

In section 10(10D), upon completion of ULIP tenure, the amount received post maturity is completely exempted. In short, no taxes are levied on your gains. 

For instance, if you have invested Rs 5 lakh in ULIP and your total gains excluding the invested amount comes at Rs 20 lakh. This means you take home about Rs 25 lakh. 

But if you withdraw your policy before lock-in period of 5 years, then the entire amount falls under tax slab. 

If the ULIP is withdrawn after maturity, so let’s take the same example of Rs 5 lakh premium paid and gains of Rs 25 lakh. After maturity the gain Rs 20 lakh is entirely tax exempted. 

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Yes you have read it right, that is one of the major factors that makes ULIP very exciting and amazing schemes. It would not be wrong to say, nobody likes to share the money earned on investment be trim down in form of taxes, and ULIP is your that answer.