Life insurance policies are no longer optional in these trying economic days. You need to protect your loved ones with a substantial financial backup plan and grow your wealth without stressing yourself. Wouldn’t it be perfect, though, if you could do both together?
ULIP plans are one such solution. They are one of the many options of life insurance that have more than singular perks of the death benefit. From growing your wealth to availing ULIP tax benefits, the advantages of these plans are many. Let’s dive deep into it.
What are ULIP plans?
ULIP plans are a type of life insurance policy. These are unique plans that allow you to not only secure your loved ones’ future with a substantial sum assured but also grow your wealth during your lifetime.
When you invest in ULIP plans, you have to choose the sum assured and policy tenure, much like traditional life insurance. However, the premium you pay will comprise 2 parts:
- Part of the premium is used for the death benefit.
- Another part is invested in the unit-linked market based on your risk appetite by the insurer.
The investment portion of your premium yields returns in real time. You can choose to invest in equities or debt funds. You may also mix them for a balanced approach to growing your wealth. During financial crises, you can withdraw the profits or allow them to continue growing. In the event of your demise during the policy tenure, if you haven’t withdrawn your growing wealth, the returns will be paid to your beneficiaries along with the death benefit.
What are the differences between regular life insurance and ULIP tax benefits?
Life insurance policies are privy to tax benefits. Since ULIP plans allow you to grow your wealth and earn capital gains, the ULIP tax benefits differ slightly from regular life insurance plans.
- Under Section 80C of the Income Tax Act, the premiums paid towards life insurance plans, including ULIPs, are deductible up to INR 1.5 lakhs or 10% of the sum assured. In the case of ULIP tax benefits, the deductible is up to 10% of the total sum assured of your plan. Exceeding that would indicate higher investments and higher returns, which would be taxable under CAGR.
- Normally, under Section 10(10)D of the ITA, there is no taxation on maturity benefits if the annual premiums were less than INR 1.5 lakhs. The death benefits are also devoid of taxation.
- In ULIP tax benefits, the same rules apply with an additional clause. If the annual income from ULIP plans is more than INR 1 lakh, LTCG tax laws will be applicable at 10%.
- ULIP plans have lock-in periods. After it ends, you are free to withdraw your earnings. However, there is a cap on withdrawing only 20% of your gains if you want to be eligible for ULIP tax benefits.
You must also bear in mind that when investing in high-value ULIP plans, the capital gains are taxable due to the higher yields. While traditional life insurance offers better tax benefits and ULIP tax benefits may not seem ideal, the capital gains far outweigh the cons of the latter.
Which is better for long-term growth?
ULIP plans were designed to help grow your wealth while simultaneously protecting your family’s future. The idea is to invest and earn capital gains and develop another source of income to tackle emergencies.
Traditional life insurance plans typically cater to the financial needs of your loved ones after your demise. They offer exceptional tax benefits and the potential to protect them from financial upheaval. However, not all traditional insurance plans are equipped to help grow your wealth during your lifetime. Some situational policies may offer bonuses or money-back plans, but the majority of them serve to help in your wealth accumulation only if you survive the policy tenure and avail of the maturity benefits.
ULIP plan is much better for long-term wealth generation. They steadily help invest your money in equity, debt funds or both and earn substantial returns. Equity investments can be a little risky, but the returns are higher, whereas investing in debt funds is a safer approach that offers steady but lower returns.
Understanding the role of ULIP tax benefits can help you moderate your investment portfolio to earn better capital gains and save on taxes. Holding ULIP investments in the long term allows you to grow your wealth exponentially, thus beating the rate of inflation too. If you refrain from withdrawing the capital gains, your beneficiaries will be entitled to a lot more profits along with the death benefit after your demise.
In terms of navigating financial planning, financial goals, and beating the inflation rate, ULIP plans win over traditional life insurance policies. But they are only brilliant solutions if you want to grow your wealth for yourself and your loved ones.