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While planning the financial future of your family members, you may come across two most renowned options, namely ULIP & Savings plans. ULIPs offer the combined benefit of insurance & investment, whereas savings plans offer assured returns. In this article, we will gain a better understanding of the two plans & understand why ULIPs are better in comparison to a savings plan.
What are ULIPs?
Unit Linked Insurance Plans offer dual benefits of insurance & investment, where a part of the premium is allocated towards life insurance & the other is invested in chosen funds. An investor can decide to invest in debt, equity, or balanced funds, depending on their financial objectives, risk tolerance level, & investment horizon. ULIP offers flexibility to switch between the funds, allowing you to achieve the long-term objectives & financial security of family members. Thus, this plan is a combination of both protection & growth potential.
What are Savings Plans?
A savings plan is a financial tool that helps an investor to accumulate wealth over a period of time with mental peace & financial stability. As it involves regular investment commitments, i.e. monthly, quarterly, or annually, it inculcates a habit of disciplined savings & helps an investor to meet future emergencies. It comes in multiple forms, such as recurring deposits, fixed deposits, ULIPs, SIPs, EPF, NPS, NSC, & others.
Tax Benefits – ULIPs Vs. Savings Plan
Though both plans offer tax advantages, their treatment is quite different. Let us gather clarity on the tax benefits offered by both plans.
- Deduction u/s 80C:
Deduction u/s 80C can be availed under both the plans on the amount of contributions made towards the plan, maximum up to INR 1.5 lakhs per annum.
- Exemption u/s 10(10D):
The maturity proceeds are exempt from tax u/s 10(10D) under the savings plan. Under ULIPs, if the premium amount is less than INR 2.5 lakhs & other conditions are met, the maturity proceeds are exempt from tax u/s 10(10D). But, if the premium amount is above INR 2.5 lakhs, the returns are taxable. This is because ULIPs include an investment component as well as reaping market-linked returns.
- Taxation on Partial Withdrawals:
The partial withdrawal can be done in ULIPs once a lock-in period of 5 years has been met, & hence is tax-free. But partial withdrawals under savings plans are not allowed.
- Taxation on Early Surrender of Policy:
If ULIPs are surrendered before completion of lock-in period, i.e. 5 years, the tax benefits provided will be reversed, & the amount will then be added in the total taxable income of the investor.
An early surrender under a savings plan leads to reduced payouts, & the tax benefits claimed earlier would be reversed & would hence be taxable.
- Tax Implications depending on Market Performance:
ULIPs are market-linked plan which has both insurance & investment components; the gains thereon are considered to be capital gains. On the other h&, savings plans offer assured returns & are exempt on maturity.
Benefits of ULIPs over Savings Plans
As discussed earlier, ULIPs offer the dual advantage of investment & insurance, resulting in higher returns in comparison with a traditional savings plan. Though an investor might look for the Best Savings Plan in India to get assured & stable returns, ULIPs stand out in many arenas, making themselves an appropriate choice. Let us discuss its benefits to understand the same:
1. Dual Benefits – Insurance & Investment
ULIP offers dual benefits of insurance & investment, i.e. a part of the premium is allocated towards life insurance, & the rest towards debt, equity, or balanced funds. In case of the policyholder’s demise, the beneficiaries will get the sum assured or the fund value, whichever is higher, ensuring the financial security of family members. Additionally, the funds grow depending on the market returns, allowing you to build substantial funds over time.
2. Wider Fund Options
As we know, a part of the premium is invested in debt, equity, or balanced funds, the choice of which depends on risk tolerance level, investment horizon, & financial objectives.
- In cases of a risk-averse investor, opt for debt funds.
- In case of risk risk-seeking investor, opt for equity funds.
- In the case of a risk-neutral investor, opt for balanced funds.
3. Switch Facility
A ULIP provides flexibility by offering an option to switch between the funds, i.e. from debt to equity, & vice versa. This decision depends on the market fluctuations or changing investment objectives.
4. Top-Up Facility
If your ULIP is performing well, it gives you the option to avail a top-up facility, which includes making a payment over & above the regular premium amount. This amount includes payment of an additional amount, irrespective of buying a new one.
5. Long-Term Investment Option
This plan best suits those investors who are looking for long-term investment plans. This is because them being market market-linked, hence it will well balance the market fluctuations & the risks associated, resulting in higher returns.
6. Additional Riders
This plan offers you an option to add additional riders, providing an added protection at some additional cost along with your regular plan, providing a comprehensive solution.
7. Taxation Benefits
This plan allows a deduction of tax on the amount of premium paid maximum up to INR 1.5 lakhs u/s 80C of the Income Tax Act, 1961. The maturity proceeds are exempt from tax u/s 10(10D) of the Income Tax Act, 1961.
Conclusion
The decision to choose between ULIP & a savings plan depends on the risk tolerance level, financial objectives, & investment horizon of an investor. The multiple benefits offered by ULIP make it the best choice for investors who look for the achievement of long-term financial goals. If an investor is looking for both insurance & growth, & is ready to accept market fluctuations, opt for ULIPs. On the contrary, if an investor is looking for assured returns & mental peace, opt for a savings plan.
