When it comes to making decisions regarding wealth creation or securing family’s future against potential financial distress, most Indians have shown greater affinity to participate in equity-oriented mutual fund schemes. But the re-introduction of the long-term capital gain (LTCG) tax in the 2018 budget – 10 per cent on profits in excess of Rs 100,000 earned from stocks and equity-based mutual funds – may see some investors embracing the idea of putting their money into unit-linked insurance plans (Ulips) instead of mutual funds. Here are some reasons as how Ulips have become a good financial product:
EEE tax benefits in Ulips help save tax
Monetary instruments with tax saving options appeal more to taxpayers’ particularly salaried or non-salaried people. In addition to the advantages of safety, liquidity and returns available on most financial mechanisms available, investors are inclined to ask about options that can help them to save tax. The EEE (exempt-exempt-exempt) tax structure available on Ulips makes it more appealing for investors.
How do EEE benefits help customers?
The common man unable to understand the tax jargons frequently inquires about the significance and implications of the EEE tax regime. It is necessary to understand that any kind of investment goes through three stages. The first stage includes money invested in the instrument that is eligible for deduction under section 80C of the Income-Tax Act. The second stage includes earnings of interest and dividends that are again not taxed. The final stage includes withdrawal of income earned that is tax-free under section 10(10D) of the Income-Tax Act.
With earnings from Ulips being completely tax-free in nature as opposed to the 10 per cent tax on profits from sale of equity shares and mutual funds, Ulip customers find themselves at an added advantage.
Why are Ulips most preferred options?
The insurance sector today is different from yester years, thanks to a host of innumerable regulations by the Insurance Regulatory and Development Authority of India (IRDAI) that put a cap on its associated costs. New-age Ulips give additional benefits like zero premium allocation and policy administration costs coupled with reduced life cover and fund management charges (FMCs), thus, resulting in expenses incurred on Ulips lower than mutual funds.
Most people are unaware about how some new-age Ulips like the Edelweiss Tokio’s Wealth Plus and the upcoming Bajaj Goal Assured Plan return the costs of life cover they charge from their customers to provide insurance coverage. Their fund management charges are also lower than that of mutual funds. In addition, other plans like Max Life-Online Savings and HDFC Life Click2Invest charge so low FMC that the overall cost of the plan along with the insurance coverage is lesser than that charged by mutual funds.
The budget implies greater tax impositions on the salaried class and those looking to earn returns from the market to beat the burden of inflation. Keeping this in purview, investors may find Ulips to be relatively attractive both as medium and long-term investments.
Other reasons that make Ulips more appealing are: Dual benefits of both insurance and investment: People usually like to keep their insurance needs separate from investment necessities. But what if an investment opportunity allows its clients to partake twin benefits by just putting money into one? The allocated amount is invested into a mix of equity and debt instruments, thus, helping customers meet their future financial goals. The associated life cover, for which insurance companies charge only a nominal amount, provides the necessary protection in case of sudden financial distress.
Switching options enable investment choices: The customer’s risk appetite decides how much of the allocated amount would be invested into equities, while the rest would be put into debt instruments earning fixed returns. Most debt instruments have earned roughly 8-9 per cent returns in the past. Customers may prefer to choose debt over equity when the market goes down and vice versa when the market goes up. The availability of multiple switching options allows customers to switch between his choices of investments without causing any awkward interruption in capital earnings.
Customers have the option to choose from a variety of investment options depending on the nature of returns they wish to earn and their future financial goals. No choice of investment must be made in haste to avoid unwarranted repercussions. Putting money into any kind of monetary mechanism involves considering factors like earnings, credibility of the fiscal instruments involved, and savings on tax in addition to the purpose for which one is looking to save. Buying Ulips fulfils all these considerations while also providing the added advantage of creating a protection cover for one’s family. For those who wish to save and invest regularly, having an Ulip certainly is a better choice than the rest.
(The author is head of life insurance at policybazaar.com)
Article originally published by Business Standard on 26 February 2018