Unit linked insurance plans have got an edge over mutual funds when it comes to tax-planning in 2018-19. This is because you now need to pay long-term capital gain tax of 10 per cent on equity related mutual funds while there is no tax on unit-linked insurance plans under the new regime.
Given the new tax-regime a lot of interest has been renewed in Ulips while inflows into mutual funds has seen a slowdown. Consider this: monthly net inflows into mutual funds slumped to a 20-month low of Rs 2,954 crore in March, suggesting that a large number of investors exit their investment held for over one year before March 31, 2018.
Ulips faced severe backlash in the falling market of 2008. It was the time when millions of people lost their life-time savings due to front-loaded structure of Ulips.Several things have changed since then. Insurance Regulatory and Development Authority of India (IRDA) came up with regulations ranging from standard cost structure to low penalties on early exit from the policy.
Having said that Ulips now comprise of four broad charges that include allocation charges, fund management charges, policy administration and mortality charges. Mortality charges are deducted to provide the life insurance cover, which gets reduced as your fund grows in value. There is also a policy discontinuance charge if you exit the policy before the completion of 5 years.
Prior to 2009, there were Ulips with premium allocation charges as high as 60-90% in the first two years. Investors paid heavy amount as penalty, when they exit Ulips during the downfall of 2008.
Cut to 2018 and there are online Ulips available with no premium allocation charges, allowing you to invest 100 percent of the premium. Earlier, mutual funds were hands down winner when it came to comparison of charges but today there are many online unit linked plans that are cheaper than mutual funds. But there is a catch. You need to stay invested for much longer term in market-linked plans to cash out the advantage of low costs.
Naval Goel, chief executive officer of PolicyX, says, “If a person invests for a long-term then Ulips provide good returns. ULIPs are also an ideal investment product from a tax saving standpoint. It offers low charges as compared to mutual funds and offers good long-term returns. It also offers the flexibility to choose the asset allocation depending on risk profile.”
To know more about lowest cost Ulips see the table given below complied by PolicyBazaar. With an average cost of 1.61 per cent these policies are cheaper than mutual funds that charge you in the range of 2 to 3 per cent.
|Zero-cost Online Ulip Plans|
|Plan’s Name||Bajaj Allianz- Goal Assure||Edelweiss Tokio Wealth Plus||Max Life-Online Savings Plan||HDFC Life- Click2 Invest||SBI eWealth|
|Prem Allocation Charge||Nil||Nil||Nil||Nil||Nil|
|Admin Charge||Rs. 400 p.a. Inflating at 5% p.a., (Subject to a maximum of Rs. 6000 p.a.)||Nil||Nil||Nil||Rs. 45 p.m.|
|FMC||0.95% – 1.35% p.a.||1.25% – 1.35% p.a.||0.90% – 1.25% p.a.||1.35% p.a.||0.25% – 1.35% p.a.|
Goel, says, “Net return of a Ulip is usually dependent on the asset allocation that you choose. For debt oriented low-risk funds, net return is usually around 6.5 per cent (on the assumed rate of 8 per cent) and for equity-oriented higher risk funds, the return is usually around 13.5 per cent (on assumed rate of 15%).”
According to new rules, insurance companies cannot deduct more than 3 per cent as cost (the difference between gross yield and net yield) on insurance policies with a term of 10 years and more. For 15 years and more the cost cannot be more than 2.25 per cent every year.
Restrictions in Ulips
There are, however, few drawbacks of investing in Ulips. Fund performance of Ulips may not be as aggressive as mutual funds. Mutual funds have the track record of offering higher returns when it comes to beating the stock markets. Also, there is a lock-in period of 5 years when you invest in Ulips, but in case of mutual funds it is around 6 months to one year.
Ulips vs Mutual Funds
ULIPs and Mutual Funds should not be confused with each other. It is important not to choose one over another. Mutual funds can be both for long and short term goals while life insurance should be bought just for your long term goals such as child’s education and retirement planning.
Goel, says, “Investors should analyze their risk profile and investment appetite and then decide whether to opt for ULIPs or mutual funds. Though ULIPs are tax-free and provide both investment and life cover which MFs do not but they do not have any lock-in period, therefore, giving the investor the freedom to buy and sell anytime.”