How does ULIP help you to save tax?

Earning and saving is the game for those who want to create an extensive corpus of money for their future. The traditional way of saving was to keep aside a fixed portion of money from the earnings, which helped but did not work to multiply the money. However, when individuals could purchase life cover and invest money in instruments like fixed deposits, mutual funds, etc., they evaluated the benefits over the capital invested.

Investing is essential to achieve your long term goals in life. Thinking on the lines, Rhea, a college lecturer and a single mother, planned to invest a portion of her salary. Unfortunately, a considerable part of her salary was deducted in the name of taxes. It affected her savings. She had to raise her only son and save funds for his future, higher education and marriage. Rhea understood that saving individually would not help her create a large volume of savings. This forced her to spot tax saving investment options. She explored the possibilities and found that she could multiply her savings on a low amount of investments. But this was possible only through ULIPs. 

Let us find out more about ULIPs, what it is and how it helps you save taxes. 

What is a ULIP?

Unit Linked Insurance Plan (ULIP) is a financial instrument using which you can make investments. It is the right choice of investment. But why?

ULIP is the only option that provides you with these:

• A life cover for the amount minimum to 10 times the annual premium you pay. The extent of cover can vary from one company to another.
• An investment option using your premium money will multiply and provide you with a volume of money over some time. The funds collected can attain different life goals like your child’s education or the child’s marriage.
• The tool provides you with the benefit to save money under Income Tax section 80 C and section 10(10D), which assists you in tax planning.

The sum of money you pay as a premium is further divided into two sections. One takes care of the life coverage, and the other goes to different funds like debt and equity. 

The important fact that any individual must understand is that you may get temporary lower returns at times than expected. But the only reason behind it is that ULIP is a market-linked investment product. The performance of the market will affect the fund value for you. Keeping the fact in mind, the investor should put the money depending on one’s risk appetite.

Knowing that ULIP comes with some associated risks, you cannot stop putting your money into investments. Everything comes with a cost, they say. Think that temporary fluctuation in the value of funds is the cost you have to bear. 

But if you look at the greener side of putting your money, the first thing you receive is the tax benefit. So let us now see what tax benefits a ULIP can offer.

How to save taxes with ULIP?

Investing money in a ULIP Plan is not just about waiting to earn the returns. Every bit of money put in the funds is a careful move you make. When buying a ULIP, one crucial consideration is the exact amount of cover of life you must take. Also, be assured of the personal objectives you want to achieve, that is, your long term goal.

The amount of money you invest under ULIP is eligible for tax deductions. According to the Income Tax Regulatory guidelines, when you invest your money in a plan, it is considered when filing taxes. In addition, the provision states that ‘any sum paid to keep in force’ a life insurance policy, can be claimed as deductions. Let us further explore the critical points about ULIP taxation. Learn about the taxes here and learn to design a tax savings strategy for yourself.

• The amount of premium paid in favour of the Unit Linked Insurance Plan makes you eligible to claim deduction under section 80 C and section 80 CCC. Section 80 C states that life insurance premium is tax-deductible. Another section 80 CCC confirms that the amount paid to the pension plan is eligible for deduction.
• The maximum tax benefit that you can claim under sections 80C and 80 CCC amounts to a total of Rs.1,50,000. It means that the tax exemption limit is defined, but you can invest any amount higher than this. Essential for you is to understand how to save tax with ULIP. Supporting more than the tax exempted amount will not save your deductions.

Let us look at this with an example. Imagine that you paid Rs.3.6 lakhs in ULIP investments as the annual premium. In this case, the total amount of tax benefit you are eligible for is Rs.1.5 lakhs only. So if only tax deductions are your concern, make sure that your premium is less than 10% of the Sum Assured when investing in ULIPs. 

• Other than this, the returns on ULIP at the time of maturity are exempted for income tax under section 10 (10D). It confirms that ULIP comes with a dual benefit under its plans.

Apart from saving your money through tax deductions, ULIP still attracts many individuals to invest money in this.   

Why do people invest in ULIPs?

A unit-linked insurance plan is believed to be the most affordable insurance policy that gives you both life coverage and options to invest. Here are a few reasons to count as to why people invest in ULIPs.

• Financial Long Term Goals: When you know that you will require a handsome amount of money in future but find no means to attain that, ULIP turns out to be the best idea. ULIP is a good investment option because it has a compounded effect on the money. This instrument is better because the amount of money you invest also gets a compounded effect in the lock-in period.
• The flexibility to switch portfolios: ULIP provides the convenience to switch between the portfolio depending on your risk absorption capacity. You can switch between the equity and the debt funds but keep in mind the current market situation. This feature is not available in other investment types.

Now that you have understood the benefits associated with the ULIP, you know the importance of investments made. For more clarity, here is why investments are crucial and how the brunt of inflation makes it essential to build a corpus of money for future needs.

Inflation and importance of investments:

The rise in the price of materialistic things decides your ability to afford it shortly. Ultimately, the worth of tour money declines when you compare it with the actual amount of purchasing power. Well, the inflation rate is not in the hand of one individual, but yes, everyone has to bear the stress it casts. Let us understand the worth of the money with an example.

Suppose Rhea made Rs15 lakhs every year and her total amount of expenses are Rs.11 lakhs. If the inflation rate is 8%, this will be the annual amount you will have considering the rise in costs.

With this, you could realize that the expenses will increase, but money’s worth is decreasing. This implies that your capacity to absorb the costs is way less. Hence, investments are essential, just like paying your electricity bills, buying food and clothes. The point which attracts attention here is that the invested money should fetch returns that beat inflation.

ULIPs can help you manage future expenses because they have a total compounded effect on the money you invest. It multiplies your earrings at a faster rate.

Investments in ULIP: Task of Portfolio Management.

There can be many ways to save tax while making investments, including life insurance policies, pension plans, and mutual funds. But if you are looking for a safe option and life coverage, ULIP will be the best choice to make. But, of course, you have already read that. 

To look more into how you can manage ULIP, you must know that it is about portfolio management. 

What is portfolio management for ULIPs?

Portfolio management is about creating and managing your own investment portfolio. In the case of ULIP, the investors must evaluate the financial goals and understand the limit of risk you will have to absorb. 

If you are unsure of how you should go about it, ask your insurance company, research the market, or ask the wise investor advisor. The ultimate tip of portfolio management to maximize the returns even with the limited investments is diversification. The quick tips here are:

• Diversify the money into the right assets and track the market trends to ensure that you get the maximum returns.
• Avoid taking risks upfront, as this is the way of life of an investor. It is best to have a good mix of financial instruments to reduce probable losses.

After reading the tips, do you think that you have plenty of time to look at individual funds or track the market swings? Worry not because when you want to track your portfolio, all information is available online. In addition, you have complete control of your account, through which you can monitor and make strategic modifications. Thinking about whether you can strategically watch your ULIPs or not?

Investment in ULIPs involves playing with your hard-earned money to save tax, get a life cover, and build a savings corpus for yourself. This is why it is relevant to strategically put your money in ULIP funds. Hence, you must consider a few things as an investor before you start with ULIPs.

Tips to keep in mind as an investor in ULIP.

Follow these tips before you invest in ULIPs:

• What does ULIP have to offer: Before finalizing the investment in the funds, determine the type of ULIP and see whether it can/will pay returns based on your expectations. Study the performance of ULIP and the nature of funds.
• Risk Factor Associated: The risk in ULIP is high; hence you must analyze the risk factor associated with the funds you put your money in.
• Financial Goals: ULIP is about wealth creation, so decide how much money you can put aside for investment. You may need this money for your retirement or your child’s education.
• Lock-in Period: Note that ULIPs in common have a lock-in period of 5 years which means you cannot surrender the policy before 5 years. If you do so, the life cover will cease immediately, and you will receive the surrender value after 3 years.

Some More Things To Know About ULIP.

• What are the types of investments you make under ULIPs?

   When you pick ULIP, you can make an investment in any of these funds:

1. Debt Funds: The premium for the debt funds is low, and the return is also lesser.
2. Equity Funds: Here, the premium is invested in the equity markets, further subjected to higher risks.
3. Balanced Fund: When you place the funds equally between the debt and the equity to minimize the risk, it is referred to as balanced funds.

• Which is a better investment option, ULIPs or Mutual Funds?

Every financial instrument has its own relevance. But if you have to choose from ULIP and Mutual funds, here is a quick look at the differences:

• ULIP is a short term or long term saving option?

ULIP is definitely for long term saving options. You need to invest money for an extended period, but the risk appears to reduce over the spread of time. ULIP plan helps in tax planning, buy life coverage, and help to create a savings corpus. ULIP is suitable for the long term as:

1. ULIP is linked with market risk, and in the short term, market fluctuations affect higher returns.
2. ULIP comes with a lock-in period of 5 years which motivates you to save for a longer time than usual. After such a long time, you get into the habit of saving money.
3. The investment under ULIP offers flexibility which means that you can switch from one fund to another easily. This way, you can earn better proceeds in the longer run.

• Can we surrender ULIP at any time? 

Yes, you can surrender ULIP at any time. However, if you surrender the ULIP during the lock-in period, your insurance cover will cease to end immediately. Note that you will receive the surrender value only after a specified tenure as specified by the insurer. The pay-out will be subject to deductions. Also, note that you will be liable to pay the tax deductions you have enjoyed during the lock-in period in case of premature surrender.

If you surrender ULIP after a lock-in period, you will not be eligible to pay the exit charges. ULIP is a long term investment plan; hence it is not advisable to surrender the fund because it delivers benefits in the long run. ULIP operates by investing low amounts in the initial years. Therefore, if you surrender the funds right after the lock-in period, you actually end up losing a lot of money. This is because investment in the lock-in period is more petite in 5 years. 

When in the journey of putting your money in ULIPs, make sure that you go a long way because, in the end, what you get is solid financial backing for yourself.