How tax efficient ULIPS help you meet long term goals?

Written on Monday, January 8, 2018
By Vishwajeet Parashar - Sr. VP & Group Marketing Head

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Indian investors have always been spoilt for choices when it comes to investing. From bank fixed deposits, post office savings products to mutual funds and exchange-traded funds, there are investments for every need, horizon and risk appetite. One such product is unit-linked insurance plan (Ulip), having existed in the market for almost 15 years now. Let’s revisit the product. 


Unit-linked insurance plan (Ulip), an insurance product that bundles protection and savings has undergone several structural changes of late. Unlike in the past, where premiums could have been discontinued after a certain period say 3 or 5 years, the current version requires premiums to be paid till maturity, unless you choose limited premium payment period. Hence, saving through Ulips becomes a forced savings and requires payments each year for the policy to continue. Also, unlike in the past, now the majority of charges have become standardized and spread over the first five years of the policy.


Putting ULIPS to Use  


One single Ulip can serve the need at different life stage of an individual. Before buying Ulip ensure you link it to a goal which is at least ten years away. Net of charges let the premiums be invested in the all-equity fund option. Although there’s no exit cost after five years across all Ulips, it’s bad to do so. Review their performance after five years and exit only if returns are way below the benchmark. Ulip funds generally deliver returns in tandem with the markets. Run it longer until your pre-decided maturity. Use the feature of partial withdrawals during the term of policy to fund intermittent needs such as meeting petty expenses for kids or even education and marriage needs. 


Also, keep putting in additional savings into the same Ulip plan through top-ups. Each top-up investment too will have five years lock-in and thus be directed towards long-term savings. The existing Ulip could even help you save for your retirement. Ideally, three years before maturity start shifting funds to less volatile debt funds. Use proceeds from the matured Ulip policy to park in fixed income products such as senior citizen savings scheme and bank fixed deposits at retirement for regular income. 
Fund Options
In most Ulips, there are 5-9 fund options with varying asset allocation between equity and debt. Further, within equity funds, there could be those primarily in large-caps and some in mid-cap stocks. Few have multi-caps and thematic exposure too. Under debt fund, the range could be from liquid to short-term and long-term debt funds. Any switching among such fund options irrespective of the holding period is exempt from tax. Considering the long-term nature of goals, one doesn’t need to time the markets and hence avoid the temptation to switch between funds every time the market moves 500 points up or down. 
For all your goals which are at least ten years away, opt for large-cap funds as they invest in well-established, top-rung companies and are, therefore, less volatile. Stick to diversified funds in Ulips and avoid thematic funds. A portion of the premium may go into mid-cap funds too. Once the lock-in period ends after five years, Ulips allows one to make tax-free partial withdrawals. As and when a goal is near, withdraw from the fund to meet the need. It is suggested to de-risk funds from equity to less volatile debt assets at least three years away from goal.
As the majority of charges are spread over initial five years, keep the term of the plan as long as possible and not just ten or 15 years. Charges in later years are less and there may not be surrender charges for the exit in later years. Choose plans that give you option to keep the term longer. 
It’s important that you don’t buy Ulips merely for the sake of tax savings or as a high-return investment. Save through Ulips only when one lacks the financial discipline to keep protection and savings separate. Having bought for a wrong reason may be expensive if an early exit is sought. Spending few minutes with the agent understanding the cost-benefit after a need-based discussion would minimize the risk of turning it into a bad investment. 


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